LNG exports will affect US spot market

Much attention has focused on how the Henry Hub, La., cash market for natural gas will influence world gas markets when the US begins exporting LNG.

Much attention has focused on how the Henry Hub, La., cash market for natural gas will influence world gas markets when the US begins exporting LNG. But an “equal if not greater concern” should be how gas markets in the rest of the world will affect Henry Hub pricing, said analysts in the PIRA Energy Group in New York.

Based on a study released in June, they said Henry Hub spot prices “will become significantly more volatile once US LNG exports begin, and the more export capacity that is approved and built, the greater the volatility will be.” With US LNG exports expected to crest at 9 bcfd by 2925, PIRA analysts said, “The call on US gas production will account for 5-15% of the total.”

The PIRA study said 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 will impact Henry Hub prices “much the way issues in the Mideast or West Africa influence crude oil prices.” Price volatility at Henry Hub will be influenced by LNG-related changes in the supply and 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 price movements, said PIRA analysts.

Ira Joseph, executive director of PIRA’s Global Gas Group, said, “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.”

According to PIRA, a global network of buyers and sellers will integrate North American LNG supplies within existing portfolios and impose a completely new dynamic on North American gas markets. Foreign buyers will pay a premium to Henry Hub to acquire North American LNG, but they will seek a discount relative to their current primary sources as well.

“Just as North American regional demand affects the price of Henry Hub, so will underlying and seasonal demand in markets stretching from the UK to China. Domestic end-users and seasonal storage injectors must compete with higher-priced foreign destinations,” analysts said.

Just as important, they said, “These LNG buyers are not necessarily passive cargo recipients. Rather, many of them will be actively involved in the supply chain that can directly influence North American gas markets through their continuous interaction in the following key areas: sourcing feedgas, utilizing liquefaction, transporting LNG, and deciding on where to ship cargos.”

Open US market

The open nature of the North American gas market is uniquely attractive to foreign buyers because it allows them unprecedented reach within the entire LNG value chain. “This wide-ranging penetration combines with their engagement with other global LNG producers to herald a reconfiguration of the entire LNG business. The biggest question is who in the North American energy industry will benefit from this new interest and who ought to plan their defense strategy well in advance,” PIRA analysts said.

“It is easy to see that LNG exports will tie the North American gas market directly to an assortment of buyers worldwide. More difficult to see is what issues lie beneath the surface; namely, how LNG buyers’ relationship with alternative liquefaction projects elsewhere and how evolving international gas pricing can impact North America even after the LNG plants have commenced operation,” said analysts. “Competing projects elsewhere can have a meaningful impact because most buyers of North American LNG will have the flexibility to continually select competing offers and cut back on purchases from North America when necessary, whether temporarily, seasonally, or indefinitely. As a result, production, injections, withdrawals, and the Henry Hub price—not to mention the very viability of liquefaction projects—stand to be affected.”

Once LNG exports occur en masse in North America, the interaction between global gas prices and the Henry Hub price will be bi-directional. PIRA analysts said. “The simple rule of supply and demand dictates that, ceteris paribus, LNG exports in substantial quantity will disrupt the status quo of the North American gas market. Some will win and some will lose.”

(Online June 24, 2013; author's e-mail: samf@ogjonline.com)

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