The window of opportunity for exporting liquefied natural gas (LNG) from North America is closing, making the slate of proposed projects increasingly risky and less lucrative; however, there still is room for North American gas in the Asia-Pacific market, according to the Canadian Energy Research Institute (CERI).
In a new study, “Global LNG: Now, Never, Or Later?” CERI examined forecasts for Asia-Pacific gas demand and global supply and found that most of the major liquefaction projects intended to serve the market would come online after 2015 and that supplies would surpass demand around 2020; however, after this demand would continue to rise, making room for more supply.
“Asian demand is expected to meet supply, and thus there is room for North American suppliers in an Asian market if the U.S. does not proceed with all planned projects,” the study said. “Rapid LNG growth in Australia has driven up construction costs, and it may make sense for North American companies to develop LNG projects in a staggered manner post-2020.”
On the market side, regions where demand growth is expected to be the most robust — China and India — do not offer prices as high as those available in South Korea and Japan, the study said. “Cost overruns in Australia [LNG projects] denote that newer conventional gas projects must access island LNG importing countries to obtain reasonable rates of return,” the study said. However, “Canada and the United states are competitive for both island and mainland Asian countries.”
Particularly competitive in the United States are brownfield projects, according to the study. These are held back only by transportation costs to move LNG from the Gulf of Mexico to Asian markets, the study said. The expansion of the Panama canal to accommodate larger LNG vessels may lower these costs significantly.
The study also noted an erosion of the custom of linking LNG contracts to oil prices. “Most famously is [Cheniere Energy’s] Sabine Pass [LNG] with their Henry Hub-linked formula. This could set a precedent that means North American companies are not taking advantage of the oil-linked premiums as continental gas prices are depressed. This will have implications on future gas pricing and return on investments for producers.”
While global price convergence is not anticipated, a growing spot market may continue to drive contracting alternatives due to increased supply flexibility, the study said, adding that the emerging spot market is a threat to projects that require long-term oil-linked contracts to be profitable.
“Asia is expected to generate substantial natural gas demand and while some demand may be met by pipeline infrastructure there will still be a requirement for substantial LNG imports. As contracts come up for renewal, there is an opportunity for an expanding spot market but there are many reasons that buyers may wish to remain in long-term contracts.”
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