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Analysts: As LNG Exporter, U.S. Still on the Margin

Exporting liquefied U.S. natural gas to world markets is a "feasible" but "tenuous" proposition, according to analysts at Pan EurAsian Enterprises. If the United States does become a liquefied natural gas (LNG) exporter, "it is likely to be a supplier at the margins," they said.

It wasn't that long ago that North America was seen only as an LNG importer that would act as a market of last resort for global supplies; in other words, an importer at the margins.

"A reversal of fortunes" -- as Pan EurAsian puts it in a new report -- to U.S. LNG exports "...is fragile in that the U.S. is not likely to be one of the lowest-cost natural gas producers competing in the global LNG business, especially when compared to Middle Eastern producers (such as Qatar) and to Australia."

The first U.S. Lower 48 export project announced was that of Cheniere Energy Partners LP unit Sabine Pass Liquefaction LLC, which would add liquefaction capability to an existing import terminal in Cameron Parish, LA, so as to export U.S. gas as well as import LNG (see Daily GPI, March 8; June 7, 2010). The second project, also to be bidirectional (import/export), was announced by Freeport LNG and Macquarie Energy. It would add export capability to a terminal at Quintana Island in Brazoria County, TX (see Daily GPI, Nov. 23, 2010). Backers of both of these projects have filed federal applications.

More recently, Dominion CEO Thomas Farrell said Dominion Cove Point LNG' terminal in Lusby, MD, could be converted to exports (see Daily GPI, March 14). Pan EurAsian said this project is looking like it would be a complete conversion from imports to exports; in other words, not bidirectional.

Additionally, the analysts noted that BG has said it was looking at exporting LNG from the Trunkline LNG terminal in Lake Charles, LA. "Finally, we would not be surprised to see Sempra announce that they had similar plans for the Cameron LNG facility, also located on Lake Charles," Pan EurAsian said in its report.

Pan EurAsian looked at U.S. and UK gas prices from January 2007 until the present and found that for most of that time UK gas has been more expensive. However, "there is no assurance that a large transatlantic price differential is sustainable into the future," the analysts said.

Moreover, while there might be a differential, it might not be enough. Borrowing some cost estimates from Cheniere CEO Charif Souki, the Pan EurAsian analysts figured that the difference between the market value of LNG at a European destination, for instance, and the cost of feedstock at Sabine Pass needs to be at least $3.75/MMBtu.

The tie to oil price indexes is what has been driving the large differential recently. Earlier this year, before Japan's nuclear catastrophe, Deutsche Bank Research analyst Josef Auer, in a note discussing the fact that most Asian and some European LNG prices are based on an oil index, said that "the link between oil and gas prices will make no sense in [the] future." Further clouding the matter is the prospect of U.S. LNG exports, Auer said. "If gas exports were possible [from the U.S.], this would be another great challenge for all de facto price links to the oil price that are still in place in Europe. U.S. gas exports may prove to be the final nail in the coffin of the oil price link" (see Daily GPI, Feb. 25).

Pan EurAsian noted that a delinking of Asian LNG and oil prices appeared to be in the works last summer. However, the crippling of nuclear reactors in Japan will raise gas demand, tightening LNG markets during peak seasons, they said. "...[I]t is probably not a good time for buyers to be putting pressure on LNG suppliers to do away with the linkage to oil prices."

Holding the belief that oil will remain above $60/bbl for a while, the analysts said, "...it would seem to us that European LNG markets will remain above $7/MMBtu for the foreseeable future and the Asian markets will remain higher than that," they said.

Besides the Lower 48 export projects, there are two projects to export LNG from western Canada in British Columbia. The furthest along is backed by Apache Corp., EOG Resources Inc. and Encana Corp. (see Daily GPI, March 21a). The other project is proposed by Haisla Nation and LNG Partners LLC of Houston (see Daily GPI, March 21b). Pan EurAsian did not address these projects in its report.

The only existing U.S. LNG export terminal, the one at Kenai, AK, is shutting down (see Daily GPI, Feb. 11). The ConocoPhillips-operated terminal had been selling LNG to Japan for decades but is being mothballed for want of a new contract. According to press reports, the company has said the nuclear plant shutdowns in Japan have not changed its plans for the terminal.

Information on purchasing the Pan EurAsian report is available by emailing nats@paneurasian.com.

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