Once exports of liquefied U.S. natural gas begin, the global gas market will get its formal introduction to the hub in Louisiana named Henry. The response might only be a shrug, or even less. But gas markets will feel the hub’s presence, IHS Inc. Vice Chairman Dan Yergin told a Houston audience.
“Henry Hub will establish a different pricing system, but not necessarily a much lower pricing system. But it will establish a price benchmark against which others will have to compete,” Yergin said at the LNG 17 conference Wednesday.
There is no shortage of projects clamoring for U.S. authorization to export liquefied natural gas (LNG) to non-free trade agreement countries. IHS counts at least 30 applications to export LNG in North America. But before any of these projects can put gas into the global market, they must compete with each other in an environment of rapidly escalating development and construction costs.
“Just since 2005, to develop a greenfield facility, the costs have doubled, or in many cases have quadrupled,” Yergin said. “Each facility is different; each situation is different…but that kind of cost escalation is really the Achilles heel of LNG, and it is going to be the challenge for the industry…LNG [project] costs may deter investors long before Henry Hub prices are pushed up.”
Henry Hub will carry weight in the market, but it won’t weigh on prices as much as some have suggested, Yergin said.
“The U.S. will set a new competitive price benchmark for gas around the world. Obviously that doesn’t mean that everyone by any means will adopt that pricing system; they will not,” Yergin said. “But it will be possible in some cases to deliver gas from the U.S. to almost any global coastal port for perhaps around $12/MMBtu. Not all the gas in the United States will make that price, but that will be a price threshold that will be very significant for the industry.”
IHS projects that global gas demand will double by 2040 from where it is today, Yergin said. “And that 620 Bcf/d that we’re talking about in 2040, for those thinking in oil terms, would be equivalent to 100 million b/d of oil equivalent, which is larger than today’s world oil market,” he said. The main driver is the power generation sector.
“If we go back five years ago, just five years ago, natural gas was about 20-21% of electric generation. Today it’s over 30%; it shows you how fast those changes continue,” Yergin said.
Natural gas is in a horse race right now with coal and oil. For instance, while gas has been pushing coal out of the power generation market in the United States, the exact opposite is happening in Europe, where cheap coal is the order of the day.
Gas coal and oil combined meet about 75% of the world’s energy mix, Yergin said.”But at least in our view at this point, we would expect that round 2040, maybe a little bit before that, natural gas will edge out ahead of oil, ahead of coal and in fact become the world’s dominant fuel. What a change for a fuel that when people used to discover it they’d curse the discovery of gas and say why didn’t we find oil.”
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