In June 2010, Cheniere Energy announced its intention to export US gas as LNG as it made plans to build liquefaction at its existing—and recently completed—import terminal on the Sabine Pass, Cameron Parrish, La. Photo from Cheniere Energy.
We are on the brink of a new opening of LNG exports from an unexpected source, according to Fereidun Fesharaki, chairman of FACTS Global Energy, in a recent analysis.
Only 3-4 years ago, the US was expected to be the second-largest LNG importer in the world. Now, he said, it hopes to export almost 25 million tonnes/year (tpy) from the US Gulf Coast and a yet-to-be-determined quantity from the East Coast.
Skeptics of the plans have pointed to the volatility of Henry Hub prices, the rising cost of shale gas, and the potential regulatory challenges on the back of environmental concerns as inhibiting factors. Supporters, on the other hand, say that rising shale gas reserves and production, emerging liquids production from shale, and less-severe environmental impediments than is generally assumed would ensure the success of US shale gas-based LNG export schemes, Fesharaki noted.
Clear facts
First and most important, he said, the US may be running out of oil—geologically or geopolitically—but it is not running out of gas. "While nonconventional oil production might reach 10-15% of conventional oil, it is clear that nonconventional gas can approach a third or more of the global gas supply," he said.
Secondly, oil prices and gas prices will not converge in the US for the foreseeable future, "certainly not within the next 20 years or even longer." A fundamental disconnect between US oil and gas prices persists today, although some indirect linkage will be established as oil prices increase. Gas prices will remain substantially lower than oil prices.
Thirdly, the US Energy Information Administration's latest estimates pointing to 45% of US gas supply by 2035 coming from shale reinforces the fact that the "huge shale supplies in the US are real and can be counted upon." While the impact on the water tables and potential problems may lay ahead, he noted, for now, exports from the US are "technically, economically, and legally possible and indeed inevitable."
Prices
Even if Henry Hub prices rise to $8-10/MMbtu while oil prices are in the $120-150/bbl range, "we are talking about Asian prices of some $20/MMbtu." US exports, therefore, still make sense, even if certain pitfalls remain as far as environmental opposition is concerned. But, in most cases, $1-2/MMbtu additional costs can fix any problem.
"If the gap between [Henry Hub] prices and Asian prices is so wide, these additional costs can easily be accommodated," he said.
Moreover, Fesharaki said there is "almost zero chance" of a big change in the price structure in Asia in the foreseeable future. LNG prices will hover between 80-90% of crude, and larger LNG supplies are unlikely to result in a break in the price due to high costs in construction and delivery of LNG. As such, US LNG exports to Asia will "certainly work under almost any scenario."
For Europe, however, the story is not so simple, he said. While transportation costs are lower, price certainty in terms of oil linkages is not there. The futures of Henry Hub and the UK National Balancing Point price directions are not as clear.
Some observers, including Fesharaki, see a closer linkage developing over time. As such, while Europe might be a market for US LNG exports, it cannot compete with Asia, which offers "solid oil price linkages and substantially higher prices than Europe."
Why attractive?
What makes LNG exports from the US attractive to buyers is a combination of lower prices and destination flexibility.
For Asian buyers, destination flexibility is just as important as price. Many Asian buyers will view US LNG export projects not only as supply sources, but also as an insurance policy for their portfolios.
A price of Henry Hub plus roughly $2/MMbtu fob with full destination flexibility, he said, can be a valuable part of their supply portfolios. There are also options not to take the volume and simply pay the $2/MMbtu fee.
How much will be exported from the US? Although future export volumes could be large or small, Fesharaki believes it will take a while before long-term buyers see these exports in the same light as, for example, Qatari or Australian exports. But some volumes—1 bcfd, or 7.5 million tpy at the minimum—will be exported.
US LNG exports might well come to market in the next 3-5 years and the size and direction will depend on several factors, such as consumer comfort levels, as well as on continued confidence in the smooth growth of the US shale gas production.
It is not impossible for US LNG exports to grow much larger over time. As of February, no fewer than three companies had announced plans to reconfigure their existing terminals as bidirectional export plants: Dominion (Cove Point, Md.), Freeport LNG (Macquarie Energy and Freeport LNG Expansion LP), and Sabine Pass Liquefaction LLC (Cheniere and Sabine Pass LNG).
Of all these schemes, Fesharaki believes Cheniere's plan to export as much as 16 million tpy of LNG from Sabine Pass, La., has attracted the most interest from prospective tenants. As of early March, Cheniere had accrued provisional commitments for up to 8.3 million tpy of LNG from Sabine Pass.
Nonbinding memoranda of understanding for bidirectional throughput rights at Sabine Pass are in place with ENN Energy Trading Co. (1.5 million tpy; PennEnergy, Nov. 11, 2010), Morgan Stanley Capital Group (1.7 million tpy; OGJ, Jan. 17, 2011, Newsletter), Gas Natural Fenosa (up to 1.5 million tpy; OGJ Online, Dec. 1, 2010), EDF Trading (0.7-1.5 million tpy; OGJ Online, Jan. 21, 2011), and Sumitomo (up to 1.5 million tpy; OGJ, Feb. 7, 2011, Newsletter). Cheniere also boasts an MOU for the ex-ship sale of up to 0.6 million tpy of LNG with Best Energy.
Reexports
Finally, there is another kind of LNG export from the US. Reexports are volumes that have been unloaded and reloaded for the express purpose of sale to markets abroad. So far, several US terminals have been permitted to export LNG: Cameron LNG, La.; Freeport LNG, Tex.; and Sabine Pass LNG. In 2010, a dozen cargoes were reexported and this number may increase in 2011 to around 20 cargoes.
There is little chance of a serious upswing in reexports, however, Fesharaki believes. Clearly, the exporters of LNG to the US will be unhappy to see their LNG exported at three to four times the price they received. This kind of US export activity has limited potential.
Next, he said, will be potentially huge exports from Canada, based on shale gas from the Horn River and Montney basins. Exports from Canada's Pacific Coast, however, are likely to run a few years behind the US.
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