Those who worry that export of liquefied domestic natural gas will invite global oil price volatility into the U.S. gas market are forgetting about fungibility, Rice University energy fellow Ken Medlock said during a recent presentation.
"One of the things that's sort of commonly stated is that if we allow exports, we're going to import oil price volatility. Most people will generally say that's a bad thing because oil is very volatile. But if you look at the data, interestingly enough, what you see is that the price at Henry Hub historically has been much more volatile than the price of, say, Brent crude," Medlock said during a BNP Paribas webinar.
And while it's true that oil prices can be affected by a whole smattering of geopolitical events, it's also true that "oil is a dramatically more fungible commodity than natural gas on the global stage," Medlock said. "What that means is that any incident in one part of the world will be traded through very, very quickly, because of how fungible the commodity is in general."
Most of the Lower 48 export terminal proposals that are expected to come to fruition are brownfield facilities where liquefaction is being added to existing regasification capability, making the terminals two-way ports.
"If you begin to export gas and you have the capability to import gas, you actually do add fungibility to the U.S. gas market," Medlock said. "Let's say you're exporting natural gas from [Cheniere Energy Inc.'s] Sabine Pass [terminal in Louisiana] in the form of LNG and it's focused on Asia or focused on Europe...It doesn't really matter.
"Let's say the price here begins to rise because we have a really cold winter one year. If you have the ability to release that capacity and meet your contractual obligations, should they be binding for LNG deliveries to your Asian buyer or to your European buyer, then what you effectively do is you release that 2 Bcf/d of capacity back into the U.S. market. What that means is you're effectively adding fungibility because you have an additional 2 Bcf/d you can release, in addition to what you can bring from storage, back into the U.S. market, and that can actually dampen volatility."
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