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North American LNG Export Plans Keenly Watched

North American liquefied natural gas (LNG) export plans are on the table from coast-to-coast-to-coast, offering a tantalizing option for buyers in Europe and the Asia Pacific region that want secure and reliable energy supplies, a Wood Mackenzie Ltd. energy analyst told NGI this week.

If any of the export projects are able to carry gas supplies to overseas ports, North America would begin to integrate with world gas markets -- and higher prices, said Noel Tomnay, who heads Wood Mackenzie's Global Gas Research.

"Clearly the U.S. market is disconnected today in terms of price," Tomnay told NGI. "Henry Hub today is around $4, and we have much higher spot prices in Asia and Europe. In Europe gas prices are $8.50-10, and in Asia for the last couple of years it's been trading at a premium to the NBP [National Balancing Point]" in the United Kingdom.

"In recent history, we've seen linkages between the U.S., Europe and Asia in various forms," Tomnay said. "Looking out to 2020, each region's gas market dynamics will continue to influence supply and demand, and regional gas prices..." It will depend on whether North America's LNG export plans move to fruition.

"As North America moves toward becoming a potential exporter, this will have an implicit impact on price even before the first molecule of LNG is loaded on a ship. North America LNG exports presents a number of questions for the global gas market: How much LNG volume can be exported before it becomes self-limiting? What will choke volumes first -- rising U.S. gas prices that make it sub-economic or the fear of price rises, which might drive vested interests to persuade regulators to restrict exports? And will the threat of North America LNG exports present a future ceiling for European gas prices?"

The expectation, he said, "is that the Asian market will be more of a natural baseload source" no matter from which North American port LNG is exported. "No matter if it's the Canadian West Coast, U.S. East Coast and Gulf Coast LNG, there would be much better pricing" for gas to head to Asian markets rather than Europe.

Several LNG projects are under way worldwide, led by Australia and Qatar, but the current view is that those projects wouldn't shut out North American LNG, he said. Buyers like to diversify their purchases to ensure that supplies are readily available, and North America would offer a stable and reliable partner. In addition, infrastructure costs are escalating, especially in Australia.

Australia's labor market has tightened considerably because there's "an overheated market for oil and gas, LNG, mining, coal and so on," said Tomnay. The country also is facing a pushback involving local market access for gas. In addition, the exchange rate could favor U.S. supplies.

It will take a couple of years before U.S. gas prices increase enough to make LNG exports viable. In that time facilities will need to be built or reconfigured. However, "an industry consensus view of U.S. gas prices at $5.50 to $7.00 would make North American LNG cost competitive," he said.

"LNG suppliers control just so many eggs in Australia, and inevitably they may be keen to redistribute some of their supply risk by obtaining supply from new sources," he said. "As LNG from Australia becomes more expensive, as the labor market continues to tighten, there's more headroom for North America. Consequently, LNG exported from North America on the West Coast, East Coast, Gulf Coast...would start to look quite cost competitive" for Asian markets.

The Japanese nuclear crisis has sparked some optimism among gas bulls, but Tomnay said it's way too early to determine whether the nuclear industry has suffered a fatal blow.

"In the long term we can argue about whether the Japanese nuclear crisis is a game changer or a setback for the nuclear industry," Tomnay said. "In either event, it will result in a tighter gas market in the longer term. If it pushes LNG exports up or whether it pushes nuclear back by five years, it doesn't matter...The implications are yes, Asian demand for LNG is inevitably higher. Where does that LNG supply come from? The 'belle de jour' has been Australian LNG...but it's getting increasingly expensive."

Only two LNG projects are onstream in Australia now. However, four more facilities are under construction, all backed by Big Oil.

"Australia never had more than two [LNG facilities] at one time," Tomnay noted. "Now there are four. Australia's capital expenditure for oil and gas has never exceeded $10 billion. Now its annual expenditure will be three times that over the next 10 years...We're starting to see projects delayed, 25% cost overruns...the same in the coal sector, and in domestic oil and gas. It's already expensive to operate in Australia because of infrastructure issues and it's going to get more expensive."

And the higher expense will be an issue for LNG buyers, he said. "The emphasis is on the future...they are looking at who can deliver monetization, competitiveness, strong contractual relationships. Who can provide a long-term construction program?"

Chevron Corp., which is sponsoring two LNG mega projects in Australia, Gorgon and Wheatstone, appears to have prepared for the current labor and pricing issues facing the country. Once Gorgon is completed, the plan is for the "same team to move to the other project...Chevron has a wonderful vision of expansion of its projects to last for 10 to 15 years. If it's able to do that, it could keep its costs relatively low," Tomnay said.

"Everyone has his own ace, his own trick to control costs. It becomes quite a risk for buyers concerned about scheduling overruns, cost overruns...As a company sees cost overruns, such as a 12-month delay...buyers start to think, 'I've got to diversify the supply portfolio and not rely too much on Australia.' Politically, that's quite sensible."

The current Japanese nuclear crisis isn't going to positively affect U.S. gas markets in the same way they were impacted in 2007 and 2008 when Japan lost a nuclear reactor. "The market at that time both in Europe and in North America was really quite tight," said Tomnay. "Spot cargoes that went to Japan in 2008 were priced at around $20/MMBtu. Now the spot price of LNG delivered into Japan is less than $11...There is a much less tight global gas market, and the impact of Japan importing some cargoes in the short term is not likely to have the same sort of impact of the prices in 2008. It's a different scenario."

While North America remains "awash" in gas, Asia Pacific markets will be challenged by a lack of supply, said the Wood Mackenzie gas expert.

Pacific-based LNG is "insufficient to meet growing demand in the medium term," and "we can anticipate a growing reliance on Middle East and Atlantic LNG imports," he said. "Particularly between 2013 and 2016, the market in Asia is looking tight, and recent events may increase this tightness, which in turn would have repercussions for Europe.

"If Europe also tightens in the same time frame, as we think is increasingly likely, then we may see a pronounced price spike." Beyond 2020, Tomnay suggested that the high cost of new Australian LNG projects would keep Asian Pacific long-term contract prices high.

Beyond North America and the Asia Pacific regions, Europe remains the "most vulnerable" to supply issues, especially over the medium term, said the Wood Mackenzie analyst.

"The last few years of oversupply may have resulted in European complacency regarding supply security," said Tomnay. "However, our analysis suggests that Europe could be as much as 100 billion cubic meters short of gas within as little as seven years. To address this, new supply projects over and above that presently on the drawing board are required. In the medium term the likelihood is that Europe will compete with Asia for LNG supply and become more reliant on supply from Russia."

Wood Mackenzie is "awaiting with interest" whether North America's emerging LNG export market will gain required approvals.

"I think it's fair to say that the influence in Europe insofar if North American LNG exports exist, presents supply competition to tight gas suppliers, particularly Russia," he said. "Consequently, if the decision is not to allow U.S. LNG exports, that supply competition no longer exists. Then gas suppliers would be able to charge a higher price for gas in the future because that potential supply competition will have been removed."

Consumer groups in Europe "may well be lobbying in Washington, DC, to ensure there is ample European gas" from more than a single supplier.

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