The Gas Exporting Countries Forum (GECF), including representatives of most of the world’s largest natural gas-exporting countries, agreed Monday to work to shore up natural gas spot prices by indexing them to oil, attempting to return them to the historical oil-gas ratio of 8-10 to one from the current 20-1.

However, the group, meeting in Oran, Algeria, failed to agree on production cuts to underpin the policy, according to various overseas news reports.

Chakib Khelil, Algeria’s energy minister, had proposed a cartel-like strategy of cutting production to boost prices, similar to that of the Organization of Petroleum Exporting Countries (OPEC), Bloomberg said. But he failed to get critical support for the proposal. Much of the world’s gas exports are under long-term contracts tied to oil, so some nations already are collecting a higher price for a sizable part of their production. The glut in new supplies has mainly pressured the spot market.

The glut has developed as massive new liquefaction projects came on line in major exporting countries in the last 18 months, just as liquefied natural gas (LNG) lost much of its expected market in the United States to the development of North American shale gas. The U.S. market had been touted as the market of last resort for LNG, but at prices of about $4.00/MMBtu that market is not a very attractive one compared to oil, which is collecting in the neighborhood of $8-10/MMBtu.

U.S. “shale production has made a mockery of previous estimates of U.S. LNG import forecasts,” analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH), said in a study released Monday (see Daily GPI, April 19).

But the notion of cutting back production to boost prices isn’t likely to work very well with LNG. Its producers and analysts have long explained that given the very high capital costs and very low variable costs, cutting LNG production is not an option. “Once liquefaction is built, it tends to just run. No LNG player would think about shutting down,” John Hattenberger, managing director of Gazprom Marketing and Trading USA, told an audience at GasMart 2009 last May (see Daily GPI, May 21, 2009).

Hattenberger estimated Gazprom’s capital costs and return at $2-6.50/MMBtu, while operating costs run $0.00-1.65/MMBtu. Looking in the crystal ball last May, Hattenberger predicted that more than 10 Bcf/d of LNG would go online in 2009 and 2010 with more than 4 Bcf/d of that increase targeted at U.S. markets. In its latest study TPH cut its total 2010 U.S. LNG import estimate to 1.8 Bcf/d from 2.5 Bcf/d.

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