The impact of U.S. exports of liquefied natural gas (LNG) on global gas markets would be more significant than what would be felt at home, a new analysis by Deloitte found. World gas prices would decline further than domestic prices would rise, and U.S. exports could hasten a migration away from oil-indexed gas contracts, the firm said.

“Since supplies for U.S. LNG exports are expected to be pegged to U.S. gas prices (e.g., Henry Hub), rather than oil prices, the incremental volumes could result in global gas markets transitioning more rapidly to prices set by ‘gas-on-gas’ market competition,” Deloitte’s Tom Choi and Peter Robertson said in their report “Exporting the American Renaissance: Global impacts of LNG exports from the United States.”

Their analysis was based on the World Gas Model and considered three export cases (no exports, 6 Bcf/d to Asian markets, 6 Bcf/d to European markets) and two scenarios (business as usual and competitive response). Gas price indexation to oil prices has more staying power in each case under the business as usual scenario. However, in the competitive response scenario, global gas supplies are more competitively priced.

“A major uncertainty facing global gas markets is how long gas prices will be tied to oil-indexed prices,” Deloitte said. “U.S. LNG exports could have a significant impact in determining the outcome…U.S. LNG may help erode the hold of oil-price indexation and transition markets to more competitively set prices, which are likely to be significantly lower.”

According to a chart in their report, under the business as usual scenario, exporting 6 Bcf/d of U.S. LNG to Asia could lower Japanese prices by almost 60 cents/MMBtu and prices at the UK National Balancing Point by a little more than 20 cents/MMBtu from 2016 to 2030. Exporting the same amount to Europe would lower prices in Japan by almost 30 cents/MMBtu and prices in the UK by almost 70 cents/MMBtu.

Under the competitive response scenario, exports of U.S. LNG to Asia could lower prices in Japan by a little more than 40 cents/MMBtu and prices in the UK by almost 20 cents/MMBtu. Exporting that gas to Europe instead under the same scenario would lower price in Japan by about 10 cents/MMBtu and prices in the UK by almost 40 cents/MMBtu.

According to Deloitte, U.S. gas prices would increase by about 15 cents/MMBtu from 2016 to 2030 with exports of about 6 Bcf/d of LNG. However, “…the corresponding price decrease in importing countries could be several times higher,” the report said. “Furthermore, the interconnectivity of gas markets causes price impacts to be felt globally, not just in the countries importing U.S. LNG.

During a presentation to reporters in Houston Tuesday, Robertson said the gas price decline experienced by U.S. LNG importers would primarily be among nations friendly to the United States. The top gas importers in 2011, according to BP Statistical Review of World Energy 2012 data cited by Deloitte, were Japan, Germany, Italy and the United States, followed by South Korea, France, Turkey, Ukraine, United Kingdom and Spain (see Daily GPI, June 15, 2012).

“While the price impact in the U.S. is projected to be fairly minimal because of the large size of the North American resource base and responsiveness of the U.S. gas market to price signals, the global impact could be more than what the relative size of 6 Bcf/d of exports might indicate,” Deloitte said. “Because of the embedded take-or-pay volumes in long-term gas supply contracts and limited regional production in many parts of the world, U.S. LNG exports could reduce global prices and cost of supplies for importers.”

The top gas exporters in 2011 were Russia, Qatar, Norway, Canada, Algeria, “other” Africa, Indonesia, Netherlands, Australia, and Trinidad and Tobago. “As the world’s largest gas exporter by both volume and revenue and a high-cost gas provider into Europe, Russia appears to be particularly vulnerable, especially if U.S. LNG exports are sent to Europe,” the report said.

Similar to the findings of a recently released U.S. Department of Energy (DOE) study that found that the market would act as a governor on export projects, limiting arbitrage opportunities as price spreads decline (see Daily GPI, Dec. 6, 2012), Deloitte said “…the market will likely limit the volume of economically viable U.S. LNG exports.”

Robertson said he and Choi would be presenting Deloitte’s findings to DOE, which will be deciding how many more authorizations to export domestic LNG to non-free trade agreement countries to award.

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