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Merrill Lynch: Oil Prices Could Point LNG Cargo Direction

A rising tide of liquefied natural gas (LNG) will lift deliveries to terminals in Europe and the United States this year, and traders seeking insight into which side of the Atlantic Basin will get the bulk of the LNG spillover should watch oil prices, according to analysts at Merrill Lynch.

"[R]ising oil prices could help widen the premium between UK NBP [National Balancing Point] and U.S. Nymex natural gas prices. In contrast, in a low oil price environment the spread between U.S. and UK forward natural gas prices for this summer -- which has already fallen to 65 cents/MMBtu from $1.17/MMBtu in January -- could decline further, pushing more volumes to U.S. shores."

The analysts predicted that LNG producers will be willing to take netbacks as low as 70 cents/MMBtu, which suggests that UK NBP or U.S. Nymex gas prices would have to go to $2.50/MMBtu or less before widespread shut-ins of liquefaction capacity would occur, they said. Variable LNG production costs can vary widely from 50 cents to $2 per MMBtu, they noted.

Earlier this year Chuck Yost, president of Merlin Associates, a Houston-based engineering consultancy, suggested that those trying to place LNG cargoes in the U.S. market might have to bow and scrape for a $1-2/MMBtu regasification terminal tailgate price. He noted that China and India could offer more attractive netbacks to Qatari producers than the U.S. market (see NGI, March 9).

In a weekly note on gas sendout from U.S. LNG regasification facilities, Tudor, Pickering, Holt & Co. Securities Inc. analysts noted last Monday that weak U.S. gas prices are still discouraging incremental LNG imports into the U.S., although the tide would seem to have been turning on the UK's gas price premium to Henry Hub. According to Tudor, Pickering, Holt, one year ago the UK gas price was $1.71/Mcf more than the U.S. price. The previous week it was 78 cents more; however, that was up from 44 cents a month ago. Sendout from U.S. regasification plants is up, according to the firm. To date in April sendout has been about 1.2 Bcf/d, up from about 0.9 Bcf/d a year ago. For the first quarter of this year sendout was about 1 Bcf/d, up from about 0.8 Bcf/d during the year-ago period.

LNG supply is set to expand this year and in 2010 as a number of liquefaction projects are slated to come on-line worldwide, the Merrill Lynch analysts noted. "The current situation is basically the reverse of the one observed in the past two years, when LNG supply was constrained by a lack of liquefaction capacity and low utilization rates due to technical problems," they said.

Indeed, last summer spot LNG was selling for as much as $25/MMBtu, or an oil equivalent of $145/bbl, the analysts noted. The Korean market was paying up to $25/MMBtu on the spot market; Japan had paid more than $20; India had paid around $17; and China had bought spot cargoes for around $15, Kathleen Eisbrenner, Shell Gas & Power executive vice president for global LNG, told attendees at GasMart 2008 in Chicago, which was not quite a year ago (see NGI, May 26, 2008).

Since then there has been some rumbling of a need for LNG liquefaction capacity in the U.S. Gulf Coast to export burgeoning shale gas production to Asian markets (see NGI, Aug. 4, 2008). Some have said such exports would be a political non-starter. However, a proposed LNG regasification project in Western Canada has recently been reconfigured to be an LNG liquefaction and export facility (see NGI, Dec. 15, 2008).

Some are of the opinion that the U.S. is slated to get an onslaught of LNG later this year. Mercator Energy President John Harpole told NGI that global LNG supplies, from Qatar and Russia in particular, will be needing a home in a world where gas demand has been raked by economic recession. The United States -- with its abundant gas storage capacity -- is a likely destination, Harpole said.

"I believe that import number will be by August at least two ships a day, or 6 Bcf/d," he said. LNG from Russia's Sakhalin II production area as well as from Qatar, where capacity is being expanded, could very well flow at any price, Harpole thinks. "I just don't think those producing countries can afford to shut in a $14 to $20 billion [liquefaction] facility because they don't like the worldwide price of gas. And if they're not buying gas in Asia or Europe you're probably going to send that gas here.

The Merrill Lynch analysts said there will be no shortage of tankers to carry additional production as the global tanker fleet has grown from about 150 vessels in 2003 to more than 300 today. This suggests that LNG transport costs will be relatively inexpensive in the months and years ahead, they noted.

In the near term European markets are needing to rebuild their natural gas stocks, the Merrill Lynch analysts noted, and they will rely in part on LNG cargoes to do so. Demand for LNG in Europe has been given further support by Russia's recent reduction of gas exports to Ukraine during the coldest winter in a decade, they said.

Longer term the analysts said they are "positive on LNG fundamentals," in part due to the expectation that liquefaction expansions could slow as early as 2012 and the fact that Brazil, Argentina, Chile, China and Kuwait are adding regasification "against a pretty constrained long-term LNG supply picture."

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