Potential exports of liquefied natural gas (LNG) representing 5-15% of U.S. natural gas production will bring “significantly more” volatility to Henry Hub gas prices, with more exports making for greater volatility, consultancy PIRA Energy Group said in a new report.
With U.S. LNG exports forecast to crest at about 9 Bcf/d (about 91 Bcm/year) by 2025, including about 8 Bcf/d (about 81 Bcm/year) from the Gulf of Mexico, the call on U.S. gas production will account for 5-15% of the total, PIRA said. According to study author Mickey Kwong, “Depending on the degree to which this new form of demand is indifferent to North American market developments, the Henry Hub price ramifications will be substantial, at least in the short term.”
Most of the discussion about whether LNG exports would be good for the country has focused on how much exports would lift domestic gas prices (see NGI, May 20) or what affect U.S. exports would have on the global LNG market (see NGI, Jan. 14).
PIRA’s “Liquefied Henry Hub: The Repercussions of North American LNG Exports at Home and Abroad” found that an equal, if not greater, concern should be placed on how gas markets in the rest of the world will affect Henry Hub pricing — because the influence will be significant.
The firm looked at issues ranging from Russian gas production and seasonal gas use in a storage-short Europe to Japanese nuclear policy and bearable gas prices in Asia. These will impact Henry Hub prices on a daily basis, much the way issues in the Mideast or West Africa influence crude oil prices, PIRA said.
Price volatility at Henry will also be influenced by LNG-related changes in the supply-demand balances within the North American market. “The timing of new supply, combined with domestic gas demand growth from low Henry Hub prices and the stability of LNG production, add significant layers of complexity to the movement of Henry Hub prices,” PIRA said.
PIRA’s Rich Redash, managing director, told NGI that weather events in Europe and the “tremendously seasonal” nature of gas production in Russia and Norway will be linked to and felt at Henry via LNG exports, not to mention demand in Asia and the region’s general lack of storage capacity. “You have this butterfly effect that clearly ripples into the North America market, just increasing the overall connectivity to global events and their impact on the North America market,” he said.
While Asia lacks storage capacity, the United States currently has plenty of capacity, much of it created in the Gulf Coast region in anticipation of imports of LNG to the United States and the need to balance supplies of incoming gas with domestic production. With heightened volatility at Henry expected from exports, regional storage will be more valuable, Redash said.
“It’s definitely going to increase the value of storage in some areas,” he said. “Site selection is going to be very important when it comes to how valuable the existing stock of storage capacity we now have on our hands is…There’s no doubt the importance of that storage will be heightened by the potential risk to LNG exports, whether it’s economic risk…or non-discretionary events outside of economics, such as hurricanes.
“If we’re exporting 5 Bcf/d out of the Gulf by 2020 or 10 Bcf/d by 2025, and we have a weather event along the lines of a Rita or Katrina, that doesn’t necessarily have to impact the facilities themselves, but it creates a logjam of tanker arrivals and departures…” Storage will be particularly important under these circumstances, he said.
Extended periods of time will emerge when North American LNG exports are “in the money” and “out of the money” in the global gas market context, PIRA said. Exactly how lifters of North American LNG react to these external market forces will work their way back into Henry Hub pricing.
“The changing dynamic in the market is that the fairly insular world of North American gas markets and Henry Hub pricing will be immediately exposed to supply, demand, inventory and pricing issues in other parts of the world,” said Ira Joseph, executive director of PIRA’s global gas group. “These factors were previously insignificant or ignored entirely by North American gas trade.”
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