By OGJ editors
HOUSTON, Sept. 27 -- Low-price LNG deals of recent years in Asia could be things of the past because the future direction of the US natural gas market will have a profound impact on the global LNG market, including Asia.
Jeffrey Brown, chief economist of FACTS Inc., Honolulu, said that if US prices remain high, LNG will be drawn to the US, tightening the LNG market. Asian buyers must be aware of looming LNG demand in the US, he said.
"In contrast, if a large amount of Middle East liquefaction capacity is built targeting the US market, and US gas prices subsequently drop, then Asian markets could look quite attractive—the trend toward relatively low prices for new Asian LNG contracts could continue," Brown said.
He expects gas prices to remain relatively high because the correlation between US gas prices and oil prices has weakened during the past decade. Brown forecasts "a sustained $4-$4.50/MMbtu price range with seasonal price spikes."
The US imported 10.6 million tonnes of LNG in 2003. The US Energy Information Administration forecasts that the US will import 44 million tonnes in 2010, 64 million tons in 2015, and 96 million tonnes in 2025.
Gas demand
"To be blunt, the time for Asian buyers to sign new LNG supply contracts is now," Brown said. "Asia will always be an appealing market vis-à-vis the US market because it offers relatively stable prices. But the longer that US gas prices remain high and the more obvious it becomes that the US market has moved to a new price plateau, the less willing suppliers are going to be to offer the favorable terms and prices that Asia has witnessed over the past few years," Brown said.
The fast-growing LNG market in the US will connect the Asian and Atlantic Basin markets.
Development of the US market depends on numerous issues other than gas prices, including the siting of regasification terminals. But price remains important.
"In 2003, when gas prices averaged $5.63/MMbtu, gas consumption declined by 4.4%, and in 2004 consumption is projected to be flat," Brown said.
"If we assume that in the absence of high prices, gas consumption might have grown by 2% over 2003-04, which is a somewhat conservative assumption, gas consumption would be almost 1 tcf higher (approximately 20 million tonnes of LNG) in 2004 than it was 2002. Instead, US gas consumption is projected to be almost 1 tcf lower in 2004 than 2002—in essence about 2 tcf of consumption (approximately 40 million tonnes of LNG) may be lost over 2003-04 due to high gas prices," he said.
Both the US Energy Information Administration and the National Petroleum Council project that US gas consumption will grow by just under 2%/year during 2005-15. This is largely due to projected increases in gas-fired power generation.
Brown noted doubts in the industry that demand would grow that rapidly if prices remain high. "We feel there are clear indications that demand growth will stagnate if high prices persist," he said.
Gas supply
High gas prices are inducing some US supply response. The Baker Hughes Inc. rig count is up, and supplies from unconventional sources are increasing.
But US gas supplies are "stretched to their limit," Brown said. "The fact that 30% of US gas supply is sourced from wells drilled in the past 3 years is indicative of how difficult it is to simply maintain domestic production regardless of the gas price, much less increase it."
Price support
"We project that while domestic gas demand growth may stagnate somewhat in coming years, domestic supply will also be stagnant to declining, which will act to support US gas prices," Brown said.
Increased LNG imports would help limit the upward price pressure, he said, but he still believes that "the sheer size of the US market" will make LNG imports sustainable at gas prices of $4-4.50/MMbtu.
