While future U.S. exports of liquefied natural gas (LNG) depend on decisions by the federal government, the ultimate volumes and prices involved will be driven by the global natural gas market, which is rapidly being reshaped, according to a report released Wednesday by a professor at Rice University's Baker Institute for Public Policy.

The international gas market is in the process of evolving into "something dramatically different from what it is today," said Kenneth Medlock, the institute's fellow for energy and resource economics in his report, "U.S. LNG Exports: Truth and Consequence." Medlock questions whether "the lens offered policymakers" to address the question of gas exports is the correct tool.

"LNG exporters face risks associated with exchange rate movements, the development of alternative foreign supplies and the relative price impacts of introducing U.S. LNG volumes into a currently tight international LNG market," Medlock wrote. He did not opine one way or the other on the long-term economic viability of U.S. LNG exports, but he did raise doubts that the international market would sustain them.

Medlock recently told NGI that LNG export volumes from the United States are likely to be a lot smaller than now contemplated and the impact on domestic U.S. gas prices is likely to be minimal (see Daily GPI, Aug. 9). Eventually, LNG global trading practices may be completely altered, but that would be a slow process and take about a decade to complete.

In the report, Medlock argued that the geopolitical aspects of the United States becoming a gas exporter are often overlooked and the assessments take on too much of a "U.S.-centric" focus. His analysis has found that apparent profitable U.S. exports based on current market conditions are transitory because the current market conditions can spark a supply response abroad that erodes the current price differentials between the United States and other gas producing areas.

"Data on regional spot prices are supportive of this notion," Medlock said. "Aside from the apparent commercial risks associated with LNG exports, the more salient question for U.S. policymakers regards the U.S. price response to U.S. LNG exports."

One distinction Medlock makes in his report, compared with earlier assessments of proposed U.S. LNG exports by federal officials and private analysts, is that he does not assume a particular volume of gas exports. Instead, the Rice economist, who specializes in U.S. gas developments, allows for domestic and international market interactions to determine what levels of exports might develop.

Medlock said the absence of the international gas market influences in past studies is a "serious flaw" because he thinks market interactions globally "will influence price movements and trade volumes." He has followed the rapid development of the U.S. shale gas boom, following the rise in interest in exporting as LNG some of the abundant new domestic gas supplies. He noted, however, that the export strategies seem overly focused on Asian markets where LNG prices are the highest these days.

"Most future LNG profit opportunities appear to be focused on the Asian market, but this 'all-eggs-in-one-basket' approach is not without risk as future demands, policy motivated fuel choices, supply-responsiveness and unconventional gas development will each play competing roles to LNG import in Asia," Medlock said. "However, it is important to recognize that the prospect of LNG exports from the United States does not equate to large-scale reality."

Medlock is convinced that market response ultimately would limit export volumes. Domestic price impact assessments so far are being based on what he considers "incomplete assessments" of what he thinks is critical, but overlook -- namely, an international trade context.

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