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U.S. NatGas Exports Forecast to Upend European Pricing Dynamics

The potential geopolitical implications from exporting domestic natural gas overseas have been noted, but U.S. gas may already be capping the commodity price in the UK, long before cargoes arrive at European terminals, according to Jefferies LLC.

An analysis found that summer gas prices at the UK’s National Balancing Point are “in line” with the estimated cost to export gas to Europe. That could mean the United States has become the price-setter for the overseas market before actual cargoes arrive.

“If this apparent convergence becomes established, it would represent one of the most significant developments in the UK -- and wider European -- energy market for more than a decade,” said the Jefferies analysts. In effect, it would mean the UK gas price is set by the United States, “and therefore a direct pricing link would be established between U.S. shale gas production and the UK market.”

New research by the Deloitte Center for Energy Solutions and Deloitte MarketPoint LLC also is forecasting the pricing dynamics to change as U.S. LNG makes its way to European destinations. Using an export calculation of 6 Bcf/d, Deloitte said the growth of gas supplies in overseas markets would speed up the transition from oil price indexation.

“Decoupling from oil-indexed prices is already occurring in some European markets and might happen in Asian markets, especially with the projected growth in Australian LNG,” researchers said. “If Asian markets decouple from oil-indexed prices, their prices could drop sharply over the next several years.”

U.S. exports are expected to be pegged to Henry Hub prices rather than oil prices, which means the “incremental volumes could result in global gas markets transitioning more rapidly to prices set by gas-on-gas market competition,” Deloitte said.

Gas prices are projected to fall sharply in regions that import U.S. gas, while domestic prices would increase only marginally.

“The projected increase of average U.S. prices from 2016 to 2030 is about 15 cents/MMBtu, while the corresponding price decrease in importing countries could be several times higher,” Deloitte researchers said. In addition, the interconnectivity of gas markets would cause price impacts to be felt globally and not only in the countries importing gas.

“U.S. LNG exports are projected to narrow the price difference between the U.S. and export markets and hence, the market will likely limit the volume of economically viable U.S. LNG exports,” according to Deloitte.

As U.S. prices firm while prices in export markets soften, the margins between the U.S. and global markets “will narrow and limit the LNG export volumes even without government intervention.”

For example, Deloitte is projecting the spread to be reduced by 84 cents/MMBtu if 6 Bcfd of exports are sent to Europe under the “business-as-usual scenario,” which researchers calculated a 15 cents/MMBtu average increase in the U.S. price and a 69-cent decrease in European prices.

The price impact in the United States is expected to be minimal because of the large size of the North American gas resource base and the “responsiveness” of the domestic market to price signals. The global impact, however, could be more than what the relative size of 6 Bcfd of exports might indicate.

“Because of the embedded take-or-pay volumes in long-term gas supply contracts and limited regional production in many parts of the world, U.S. LNG exports could reduce global prices and cost of supplies for gas importers,” Deloitte said.

There also could be trade revenue declines in the countries importing gas. Even if gas supplies in a region were not directly displaced by U.S. LNG exports, its producers could suffer a revenue decrease because of lower prices impacting the region. In addition, gas importing countries may face pressure to adopt market-based gas prices over oil-indexed prices.

“As the world’s largest gas exporter by both volume and revenue and a high cost gas provider into Europe, Russia appears to be particularly vulnerable, especially if U.S. LNG exports are sent to Europe,” said Deloitte researchers. U.S. exports also could displace some oil consumption as power generation tilts toward more gas-fired consumption.

Australia is only beginning to step up its gas exports, but Deloitte is projecting it will become the global LNG export leader over the coming decade -- which could limit the power of the U.S. exports.

There are other LNG competitors also lurking as new Australia and Africa operators and established exporters prowl for market share.

For instance, Qatargas, the largest LNG supplier in the world, is said to be eyeing the UK and the Netherlands to expand its European presence and to counter U.S. and Australian export growth. According to Bloomberg, Qatargas wants to expand access to the Dragon LNG import terminal in Wales and the Gate terminal in Rotterdam. Import capacity at Gate and other northwestern European terminals has become more valuable in response to the start of U.S. LNG exports.

"As more people are looking to Europe the capacity value has increased, whereas in other areas it's quite the contrary,” a Gate official told Bloomberg. “Everybody was hoping for Asia demand but there demand was slower so I think capacity value has decreased there.”

Qatargas, which has seven LNG trains, has production capacity of 42 million metric tons/year.

Whether Europe becomes a bigger destination for gas supply is questionable, according to Pira Energy Group. Turning up gas demand in Europe is going to be an uphill battle, said researchers.

“As we hunt for new demand to consume all the new LNG coming to Europe, we may be losing sight of the slow but steady and accumulating impact of efficiency gains across the Continent,” Pira said. “While the focus these days is on natural gas trying to reclaim demand from coal in the power sector, that is not the only sector where gas demand has eroded.

“None of the five biggest industrial demand sectors have experienced growth in gas demand in the last 10 years. Overall, these sectors have lost over 16% of their demand. However, the story here is not necessarily the economic weakness of European industry, but the growth in its energy efficiency across all parts of the economy.”

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