Fears of natural gas price shocks in the United States and Australia due to exports of liquefied domestic gas are overblown, according to a new analysis by an industry consultant, and as each country pursues Asian gas markets, its advantages differ. Meanwhile, political risk to U.S. liquefied natural gas (LNG) export proposals has grown in prominence.

Australia is years ahead of the United States in its work to become an LNG breadbasket for Asian markets (see Daily GPI, March 8). But some in Australia fear that if/when U.S. LNG enters the market it will push Australian gas out. Not so, said analysts at Pan EurAsian Enterprises in a new research note out Monday.

“Both the Australian exporters and Australian officials are starting to voice concerns that LNG, based on ‘cheap’ American natural gas (not indexed to oil prices), can and will drive Australian LNG out of the market, leaving the new Australian [liquefaction] projects as stranded assets. We believe that our model demonstrates that fear is unlikely to be realistic,” they said.

Gas liquefaction projects are highly capital intensive with very small marginal variable costs for operation in comparison, the analysts said. “In such cases, in a buyers’ market the seller will follow the market down to the point where the sale generates no cash benefit.” However, the business model used by Cheniere Energy — which has the U.S. LNG export project (Sabine Pass) that is farthest along in the regulatory and contracting process — is different.

“In the Cheniere model, gas is purchased in a liquid market,” Pan EurAsian said. “Even if the LNG exporter also happens to be a producer of the gas, that exporter is not going to price LNG at less than alternative sale of the gas in the domestic market would yield. In short, the variable price component of the pricing decision for U.S. LNG export, using the Cheniere model, would be a larger factor than for the Australian exporter.”

So for instance in the case of BG Group, which could export U.S. LNG from Cheniere’s Sabine Pass terminal in South Louisiana, where it has acquired capacity, or LNG from coal seam gas from Australia to Asian markets, the company would export from the latter during times of weak prices in Asia, Pan EurAsian said.

The firm also said it believes that current prices for LNG delivered to Asia are unsustainable. “A more reasonable expectation for LNG delivered to Northeast Asia is around $12/MMBtu,” it said.

“A Henry Hub price of about $2.50/MMBtu puts U.S. LNG into Northeast Asia at about the same cost-driven price as from the coalbed methane LNG projects in Australia. As the Henry Hub price rises above that, U.S. LNG becomes uncompetitive. For U.S. LNG to be delivered in Northeast Asia at $12/MMBtu, the Henry Hub price cannot exceed $6.”

Meanwhile, in the United States and Australia, domestic consumers of gas worry that exports will raise their costs for fuel/feedstock. “In both countries industrial companies that use a lot of natural gas for energy or chemical feedstock purposes are lobbying the governments intensely to put constraints on exports of LNG (U.S.) or require domestic set-asides at favorable prices (Australia),” Pan EurAsian said.

The firm said these fears were “not realistic” in the United States. “We project that the practical limit to any increase in Henry Hub prices caused by convergence with Asian markets would be limited to a price no higher than about $5/MMBtu,” Pan EurAsian said. “That number changes, of course, if prices in Asia continue at present levels. Then it becomes more like $8/MMBtu, assuming a seller’s market.”

In the United States the intensity of opposition to LNG exports has grown, with powerful interests working mostly behind the scenes, Washington, DC-based lawyer and lobbyist David Wochner, a partner with Sutherland, Asbill & Brennan LLP, said last week at Argus North American Gas Markets 2012.

Industrial consumers and municipal utilities “are a very strong lobby in Washington,” he said. “For those who are interested in looking into LNG exports, this is a real group to watch. They’re [lobbying against exports] relatively quietly. Interestingly, some of them were also at the front line in the argument against NGVs [natural gas vehicles]…Everyone wants cheap gas. It is very myopic to say, ‘we want to make sure that no other industry, NGVs, exports, there’s no other use other than our use for the gas and somehow prices need to be kept low for one specific segment of industry.'”

One party opposing exports has “a significant interest in an LNG import terminal,” Wochner said.

In order for a company to export LNG it must have an export license from the U.S. Department of Energy (DOE), and its domestic export facilities must have certification from the Federal Energy Regulatory Commission (FERC). At DOE, export licenses come in two flavors: those allowing export to Free Trade Agreement (FTA) nations and those allowing export to non-FTA nations. The former are granted unless an opponent can prove they would harm the public interest; they’re essentially a given. Licenses to export to non-FTA countries are a different matter. Cheniere Energy is the first and only party to be granted a license to export (from Sabine Pass) so far, and other applications are on hold while DOE considers the potential impact on domestic markets of exports.

One study by the Energy Information Administration on the impact of exports was released earlier this year (see Daily GPI, Jan. 20). Another is under way with a private consultant, the name of which DOE has not disclosed, and the results are due this spring.

A public comment period is expected to follow the second study, according to Wochner, “which to my mind is one of the worst things that they could do,” he said “That is going to put probably a 60-90 day period after the study when anyone and their dog can come in and file comments on what the impact is going to be. As I understand it, DOE is essentially going to put together a model of these two studies and they’re going to use that model to look at all the remaining applications.”

While there had been an expectation that DOE would review applications one by one, Wochner said it is possible the four Gulf Coast projects could be considered together, with DOE allocating a certain portion of whatever exports it decides to allow among the projects. The East Coast project, Cove Point, and the West Coast project, Jordan Cove, would be reviewed individually.

Wochner, whose clients include hedge funds and investment banks, pointed out that DOE is generally an agency focused on research and development, not regulatory matters. “As a result, they have no experience in this,” he said. “They are smart people. I don’t mean to malign them, but they are out of their league in developing policy on regulatory issues like this. And there’s a lot of frustration felt in the industry as a result.

“From a risk perspective, when you’re thinking about investing…it is very difficult to make those investment decisions when you’re looking at federal government actions where you don’t know what’s going to come out in the end because the rules of the road have not yet been written.”

Cheniere is waiting for a certificate from FERC for Sabine Pass (see Daily GPI, March 21). The company has a contract with Bechtel for construction that is slated to begin March 31, Wochner said, and it’s not looking like Sabine Pass will get through the FERC process in time for the deadline.

Wochner said he was “very confused” as to why Cheniere would have set a start date of March 31 given how long it can take for things to happen at FERC. While the company and Louisiana’s congressional delegation are pushing FERC to move fast, Wochner said Cheniere is facing headwinds created by a group called the Gulf Coast Environmental Labor Coalition (GCELC), which isn’t quite what its name would suggest.

“My own sense, and this is I would say is a highly educated guess, is that they are funded by opposition to Cheniere,” Wochner said of GCELC. “They have filed pleadings [CP11-72-000] that are extremely well written pleadings — expensive lawyers. They have done significant environmental analysis. They have been really, really bird dogging Cheniere on these air issues, and this is not just a fly-by-night Gulf Coast environmental group that has a few dollars to throw. These folks are going to go the distance on this issue. I don’t think they really care about the air permit issues. I think they’re trying to slow Cheniere down.”

Wochner said the U.S. LNG export enthusiasm is reminiscent of the time about a decade ago when the rush to construct regasification import terminals was under way. Cheniere has contracts with four LNG heavyweights: BG Group plc, Gas Natural Fenosa, Gail (India) Ltd. and Korea Gas Corp. (Kogas) (see Daily GPI, Jan. 31). While Pan EurAsian said Cheniere’s contracting approach “has gained some acceptance in the market by virtue of having been accepted by four major participants in the global LNG trade,” Wochner has some doubts.

“Kogas and Gail of India signed contracts with Cheniere with basically no exit provisions in those contracts,” Wochner said. “They could have literally taken the BG contract, which was in the public domain, and started with that and said, ‘We’d at least like what BG got.’ Instead, they signed a contract because of this rush mentality — and this view, I think, of some of the foreign utilities of securing supply — and entered into agreements with Cheniere that I think are going to cause them real problems later on.”

And on the market end, would-be exporters of LNG in the United States as well as in Canada would appear to have an eager customer in Japan, the world’s largest consumer of LNG and a country weaning itself from nuclear power following last year’s meltdown at the Fukushima nuclear plant. Japan has appealed to the governments of both the U.S. and Canada to fast track LNG export approvals.

“There have been governmental level discussions about Japan trying to secure some sort of preferential treatment for exports of LNG,” Wochner said, noting talks between Japan and the United States. “Oddly enough to me, the receiving terminals aren’t even built yet; we’re looking at at least four years from now, so I think it is a bit of a ridiculous argument for Japan to try to say we need special treatment now when they can’t even get the LNG for at least four years.”

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