Gas markets wearied by volatility and hoping that the predicted onslaught of LNG will bring more tranquil markets might want to buckle their seatbelts. As LNG captures an increasing share of the North American gas market, look for greater exposure to world pricing dynamics and more competition for supply.
Be prepared for what El Paso pipeline group strategy director Pat Johnson calls "contagious volatility." At KPMG's Global Energy Conference in Houston last week, Johnson spelled out the interaction he sees taking place between the U.S. and United Kingdom energy markets.
In the last five years the value of U.S. gas storage for seasonal arbitrage has gone from 40 cents/Dth to $4.00. In Great Britain he noted the seasonal spread is an even healthier $8.00. "What happens as you bring in more LNG that is coming from locations that could also serve Great Britain? You get what you call arbitrage, and you get a translation of those [British] prices over here."
Johnson pointed out that this past January was much warmer than normal in the United States but colder than normal in the UK. LNG that could have come here did not, so U.S. prices didn't see the weather-induced softening they otherwise would have. "That's what we have to look forward to for the next 20 years," Johnson said. "We're going to share not just the weather of the East Coast and the West Coast but the weather of Europe and the weather of Russia because we're all located in the same band of the globe and we're all taking LNG from the tropics."
"This seasonality of our market is going to play very well into the hands of folks with LNG who have the flexibility to access this market when the prices are right," said J. Mike Stice, ConocoPhillips vice president for global gas and LNG, who spoke on the panel with Johnson. "It's very possible that even if we build the infrastructure to accept the LNG, long-term agreements may not be there and you'll see summer arbitrage and LNG might go elsewhere."
All of that makes natural gas storage much more important, and valuable, in the LNG era. The United States already far surpasses other countries in storage capacity, and more is needed to accommodate the coming seasonal market shifts, Johnson said. LNG can fill some of this need when operators choose to operate their vessels as floating gas storage tanks, withholding deliveries until market conditions become more advantageous. Utilizing linepack on interstate trunklines is another option, Johnson noted. "I would argue that storage is going to be the leading infrastructure requirement driven by LNG, as opposed to pipes."
Stice said that as the role of LNG grows and players take increasing advantage of the optionality it affords, it will become increasingly difficult for storage-watchers to get a fix on how much gas the market is holding in reserve, at least for awhile. The industry will figure out a way to track it, he said.
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