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U.S., Canada LNG Exports Could be Global Economic Plus

While there is uncertainty and risk, particularly for would-be exporters, the longer term ramifications for U.S. liquefied natural gas (LNG) exports could carry a number of positive aspects for the economy, both domestically and globally, according to Rice University energy economist Ken Medlock.

Medlock, an energy economist at Rice University's Baker Institute for Public Policy, recently discussed his recent report, "U.S. LNG Exports: Truth and Consequence," in which he stressed the need to analyze the potential U.S. exports from an international gas market perspective. U.S. entry into the gas export business could be "a positive force in a post-recessionary economic world," if it can, in fact, put downward pressure on global gas prices.

"This will encourage its use and accomplish a positive in terms of facilitating industrial activity [good for economies], not to mention the environmental benefits it could bring if gas displaces coal in [worldwide] power generation," he told NGI. Natural gas continues to fall short of being a true global commodity because of constraints on the ability to arbitrage price differences. "As those constraints fall, then globalization will become a reality. In other words, the LNG fleet needs to expand. Transportation differentials will persist internationally just as they do in the U.S. domestic market."

Medlock recently told NGI that LNG export volumes from the United States are likely to be a lot smaller than now contemplated and the impact on domestic U.S. gas prices minimal (see NGI, Aug. 13). His report concentrates on exports from the Gulf of Mexico (GOM) and projections that foreign LNG shippers will be eager to buy storage in the United States. Gas storage overbuild will play what he called an "intermediary role," but longer term the global appetite for U.S. storage should ramp up.

"This, in turn, could motivate some expansion of capacity down the road," Medlock said. "I think this will eventually happen here rather than in other places largely due to the regulatory certainty that North America offers relative to other regions."His analysis allowed for prospective export terminals on the both the West and East coasts, in addition to the GOM, however, realistically he thinks the concentration will be on the Gulf where the import terminals, infrastructure and local community support already exist.

"The Gulf Coast is chosen to show representative results largely because that is where the action is currently occurring in a tangible sense," but he doubts anything will happen on the West Coast [of the United States] because of local opposition. "The East Coast does present at least one viable opportunity."

In time, Medlock sees some of the risks swirling around the U.S. exports diminishing. One development he sees taking shape over time is the elimination of the requirement by developers to have oil-linked gas contracts with a specific off-take destination as part of securing financing at the upstream end. "As liquidity grows, the risk of off-take should decline, meaning the marketability of supply would be less of an issue." Nevertheless, overbuilding export terminal capacity "is a very real issue that we could be discussing 10 years from now."

The international gas market is in the process of evolving into "something dramatically different from what it is today," he said.

"LNG exporters face risks associated with exchange rate movements, the development of alternative foreign supplies and the relative price impacts of introducing U.S. LNG volumes into a currently tight international LNG market," Medlock wrote. He did not opine one way or the other on the long-term economic viability of U.S. LNG exports, but he did raise doubts that the international market would sustain them.

One distinction Medlock makes in his report, compared with earlier assessments of proposed U.S. LNG exports by federal officials and private analysts, is that he does not assume a particular volume of gas exports but allows for domestic and international market interactions to determine what levels of exports might develop.

Medlock said the absence of the international gas market influences in past studies is a "serious flaw" because he thinks market interactions globally "will influence price movements and trade volumes." He has followed the rapid development of the U.S. shale gas boom, following the rise in interest in exporting as LNG some of the abundant new domestic gas supplies. He noted, however, that the export strategies seem overly focused on Asian markets where LNG prices are the highest these days.

"Most future LNG profit opportunities appear to be focused on the Asian market, but this 'all-eggs-in-one-basket' approach is not without risk as future demands, policy motivated fuel choices, supply-responsiveness and unconventional gas development will each play competing roles to LNG import in Asia," Medlock said. "However, it is important to recognize that the prospect of LNG exports from the United States does not equate to large-scale reality."

He is convinced that market response ultimately would limit export volumes. Domestic price impact assessments so far are being based on what he considers "incomplete assessments" of what he thinks is critical, but overlook -- namely, an international trade context.

Meanwhile, a Canadian energy think tank said Asian markets offer the best financial outlet for the abundant natural gas supplies in British Columbia (BC). The Canadian Energy Research Institute (CERI) has concluded in its third report on the economic impact of exporting the BC's Horn River Shale as LNG that producers can expect higher netback prices for selling LNG in Asia, even with the higher infrastructure costs associated with liquefying the gas and shipping it across the seas, compared with transporting it in pipelines to markets in Canada and the United States.

"Furthermore...there is really no alternative for Horn River natural gas in the North American market as the entire continent has low gas prices in comparison to the rest of the world," said the CERI study, which said one of the several proposed liquefaction facilities would be built in Kitimat, BC.

In Western Canada, at least three proposed/pending projects are proposed for the Kitimat region: Kitimat LNG, BC LNG Export Co-operative (BC LNG) and LNG Canada. Both Kitimat LNG and BC LNG have received federal approval and are awaiting construction. LNG Canada, largest proposed export terminal in North America, seeks a 25-year export license for 32.95 Tcf. Another terminal is proposed for Lelu Island in Prince Rupert, BC, by Petronas, which recently bought Calgary-based Progress Energy Resources Corp.

TransCanada Corp.'s C$1 billion, 1 Bcf/d, 42-inch, 287-mile Pacific Trail Pipeline (PTP) would pick up Horn River supplies from a connection with Spectra Energy Transmission at Summit Lake. The pipe already has received environmental approval.

CERI said natural gas would continue to be a "fuel of choice" in Asia, and the potential revenues for Canadian producers greatly outpace North American markets. "The potential for revenues is substantial compared to the current North America pricing, and a potential netback of C$5-7/Mcf is foreseeable for Horn River producers if high demand for natural gas and Asian oil-linked pricing remain in the future."

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