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Barclays: U.S. LNG Can Compete

Proposed North American natural gas liquefaction projects have been popping up like dandelions over the last several months. By the count of Barclays Capital analysts, there are now nine proposals to liquefy the continent's gas and send it abroad. Asian markets appear to be the most attractive destination, they said.

"Although U.S. gas prices are significantly lower than [what] both Asia and Europe pay for contracted, generally oil-linked LNG [liquefied natural gas], the cost of liquefaction and transport reduce this economic advantage significantly," the Barclays analysts said in a note last Tuesday. "UK NBP [National Balancing Point] would have to maintain a premium of at least $3.35 (assuming $6 Nymex) for U.S. gas to break even on LNG exports to Europe."

NBP's monthly average premium to Henry Hub has exceeded $3.35 in only 12 months since 2006, the analysts noted. An analysis by Pan EurAsian Enterprises came to a similar conclusion earlier this month (see Daily GPI, April 5).

The hurdle is higher for Gulf Coast LNG that would access Asian markets, Barclays said, requiring a differential to Henry Hub of at least $5.35.

But U.S. West Coast and Canadian LNG export projects would enjoy a shorter trip to Asian markets as well as lower feed gas costs, the Barclays team said. "The cost of transport from Oregon and British Columbia to Asia is likely to be about $1 on the high side, a notable advantage over the roughly $3 required to ship Gulf Coast LNG to Asia."

However, the projects on the West Coast of North America face higher construction costs than the Gulf Coast projects due to the fact that the former are greenfield projects and the latter represent the addition of liquefaction capability to existing regasification sites. "At this point, it is unclear how much of the shipping and feed gas cost advantage [of the western terminals] will be offset by potentially higher capital costs," Barclays said.

The outlook for LNG exports shifted dramatically with the crippling of nuclear plants in Japan following the tsunami and earthquake that struck the country (see Daily GPI, March 15). "Long-term buyers will feel more urgency to secure supply in what is now perceived to be an incrementally tighter market and may be more willing to pay a higher price," Barclays said. "Yet the multitude of liquefaction projects on the horizon offers various choices, ranging from smaller-scale floating liquefaction to mega projects drawing on coal seam gas (Australia)."

Liquefaction projects excluding those in North America tallied by Barclays number 23; of these, 11 are in Australia, making that country a major contender and the Pacific Basin the main LNG arena.

Australia's LNG construction boom has driven up costs (see Daily GPI, March 24) "significantly above those of other recently commissioned projects and could have an effect on the timeline for construction of the proposed North American projects as well," Barclays said.

"Estimates on breakeven costs of the Australian projects suggest that U.S. Gulf Coast LNG can be competitive, but is likely to come at the higher end of the global LNG supply curve. The economics of U.S. Gulf Coast LNG look much less attractive than those of most of the existing Middle East and Atlantic Basin LNG, which dominate the European market."

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