Global demand for natural gas is projected to grow at about 2% per year, about twice the rate for oil demand. And liquefied natural gas (LNG) capacity, which about doubled from 2000 to 2012 could double again by 2025, according to Ernst & Young (E&Y). But it’s still early days in the U.S. LNG export game, and opinions vary widely on what will happen.
E&Y held a webinar Tuesday on global LNG growth and potential impacts on natural gas pricing. During the session, the firm informally polled about 1,000 participants, asking them how much the price spreads that make LNG exports attractive from the United States would narrow once exports begin. Twenty-six percent answered “vastly,” while 32% responded “mildly.” Another 23.5% said they were “unsure,” while 18.5% recused themselves from the poll for various reasons.
Participants were also asked to assess exports’ impact on domestic gas prices. Exports will affect domestic prices “substantially,” said 21.4%, while 39.9% said “minimally.” Some even, 8.1%, predicted a decrease in domestic prices after exports begin, and 13.7% said they were “unsure;” the remainder recused themselves.
E&Y cited Deutsche Bank Markets Research data presented at the recent LNG 17 conference in Houston (see NGI, April 22) and said Henry Hub-plus pricing for LNG exports from the United States “becomes attractive if spot gas prices stay under $6/MMBtu. Buyers like the separation from potentially rising oil prices and sellers can get a decent margin at these prices, E&Y said. “Notably, most long-term U.S. gas prices assumptions are at around $5-6/MMBtu,” the firm said.
It is still far from certain how many projects will receive U.S. Department of Energy (DOE) approval to export domestic gas to countries that are not parties to a free trade agreement with the United States. When U.S. exports enter the market, they will have global competition.
E&Y’s Foster Mellen, senior strategic analyst, said most non-North American LNG projects probably will need a netback of $10-11/MMBtu on a fully delivered basis to be successful. U.S. spot gas prices of $5-6/MMBtu would make Gulf Coast LNG delivered to Asia “extremely competitive,” he said.
“I think we have to say that we’re looking at relatively strong demand side growth for LNG and even stronger supply capacity growth over the next, five, 10, 20 years,” Mellen said. “We would stress that the way LNG is priced is likely to change to some extent. But critically, we don’t see LNG prices collapsing. The costs to supply are just too high, and we have to preserve the investment potential to develop new supply. At the end of the day, we have to remember that LNG is a very expensive game and no matter how prices are formed, it has to reflect that reality.”
One wildcard in the analysis is what tolls will be to pass through the soon-to-be expanded Panama Canal, which helps to level the playing field for Asia-bound U.S. cargoes with those from Western Canada, Australia and East Africa. Barry Munro, E&Y Canada oil and gas leader said likely what will happen is what the Panama passage grants in speed to market and cost savings, canal operators will take away in tolls, likely making the whole thing a wash.
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