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U.S. LNG Exports to Boost Trading Flexibility, Says IEA

The global natural gas trade should increase much more rapidly than pipeline gas over the next 25 years, with U.S. gas exports helping to diversify the market and make trading more flexible, the International Energy Agency (IEA) said Tuesday.

IEA's annual World Energy Outlook 2015 (WEO) provides a forecast to 2040 about the supply/demand picture for natural gas, oil, coal and alternative fuels, including renewables, through 2040. Specifically in the United States, IEA is predicting that coal will be supplanted by natural gas as the largest source of U.S electricity generation in the 2020s, and by the mid-2030s, gas should overtake oil as the most utilized fuel in the nation's primary energy mix (see Daily GPINov. 10). Forecasters also offered insight into an outlook for liquefied natural gas (LNG) exports and imports.

The LNG market is seen overtaking pipelines as the dominant way to trade global gas over the next two decades, mirroring a forecast by BP plc in its Energy Outlook 2035 issued earlier this year (see Daily GPIFeb. 17). However, IEA cautioned that low oil prices may defer investments in building infrastructure, which could lead to tighter gas trading markets.

"If the recent trend of rising costs for some greenfield LNG liquefaction plants is not turned around, then the long-term competitiveness of gas in many importing markets could be threatened," researchers said. However, inter-regional gas trade is seen on the rise to 2040 under IEA's New Policies Scenario, up by 46%, or 330 bcm (11.65 Tcf) to reach almost 1,050 bcm (37.08 Tcf).

"The share of inter-regional gas trade in global supply remains stable over the period to 2040, at around 20%, with some regions, notably Europe and parts of Asia, becoming increasingly reliant on gas imports," IEA said. "Volumes traded as LNG and by pipeline both rise, with LNG increasing more rapidly than pipeline gas, to approach a half-share in inter-regional trade."

Patterns of trade are seen changing significantly over the next 25 years as the United States becomes a major player. Australia, followed by the United States, "are the main sources of additional gas to the international market early in the projection period, followed somewhat later by East Africa, Canada and others," IEA noted.

In general, the dynamics of international gas trade "are influenced strongly by the prospect of oversupply and low prices in the medium term." The balance between LNG buyers and sellers has shifted in favor of the buyers, witnessed by the steep plunge since mid-2014 in gas hub and LNG spot prices outside North America, where prices were already low.

A lot of gas sold internationally has been on a long-term basis, but there is an increasing share of gas available on short-term. Over the next few years significant volumes of gas "will be looking for a home, at a time when lower oil prices are keeping down the price of oil-indexed gas sold under long-term contracts and when large new LNG plants are scheduled to start operation."

Australia has seven LNG projects coming online or under construction, with exports increasing from 26 bcm (0.918 Tcf) in 2013 to almost 90 bcm (3.18 Tcf) in 2020. Over the same period, Sabine Pass on the Gulf Coast will bring cargoes to market and four other U.S. LNG export projects are under construction. IEA is forecasting total anticipated U.S. export capacity to reach around 90 bcm/year (3.18 Tcf/year) by 2020 or soon after.

Projects most likely to make headway beyond those now underway in the United States because of current oil prices and the lower costs to build/renovate brownfield sites. Also, the tolling business model used to date for domestic LNG projects means "the gas price differential risk is borne by the offtakers of the LNG, not the owners of the liquefaction facilities."

Many LNG project developers worldwide are postponing, delaying and canceling projects, including in North America, IEA noted.

"Some of these concerned smaller and more speculative projects for which lower oil and gas prices were the last straw; but some also concerned large-scale projects from major companies." In North America, for instance, IEA said BG Group plc reportedly has slowed plans for its 2.9 Bcf/d Prince Rupert LNG project as a response to weaker market conditions (see Daily GPIApril 4, 2014).

By 2040, the LNG market is going to be much more diversified.

"LNG export from North America plays a major role not only in buttressing supply, but also in its increasing flexibility -- export commitments made thus far for the U.S. projects are entirely free of the destination clauses that have hampered the responsiveness of LNG trade to short-term changes in the global gas balance," IEA said.  "Greater shares of LNG in major energy companies; portfolios are also encouraging a more adaptable approach to long-term LNG supplies, away from the highly rigid delivery system model seen in the past, towards more short- and medium-term sales."

More suppliers also means more pricing mechanisms. The predominant model had been to index the price of delivered gas to movements in crude or oil product prices. Indexing lost favor after oil prices plunged starting last year and it "now risks being discredited also in the minds of sellers by a period of lower prices," researchers said.

"In our view, oil indexation is unlikely to disappear from international gas trade, but it will become just one of a number of ways to put a value on gas, alongside references to prices on gas trading hubs (where these are sufficiently liquid to provide a reliable pricing signal) and other indices linked to particular market segments in which gas will compete, notably power."

Regional pricing differences also will exist in the years to come, with U.S. gas exports "priced off domestic wholesale prices, while established exporters are likely to move only slowly away from their current systems."

For now, expanding LNG supply while oil prices remain low "is likely to take place in the United States, which has an exceptional cost profile," IEA said. "Looking to the long-term, whichever way technology turns, the LNG industry will also have to rely on the old-fashioned virtues of tight project management, competitive contracting and procurement strategies, and cost control to ensure that its product continues to enjoy high demand."

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