Will US LNG exports revolutionise the global gas market?
The emergence of shale gas has allowed the US to return to self sufficiency with relatively low and stable domestic gas prices. Many of the regasification terminals built in anticipation of increasing LNG imports now sit idle. However, several Gulf Coast and eastern seaboard LNG facilities are plotting major investments to add liquefication capacity, allowing domestically produced gas to be exported to Europe and Asia. So is the US shale revolution about to go global? At first glance the economics look overwhelmingly compelling but there are still significant obstacles that need to be overcome…
In the middle of the last decade the US was faced with declining domestic production and the prospect of increasing reliance on LNG imports to meet demand. Yet scarcely five years later, the emergence of shale gas has allowed the US to return to self sufficiency with low and stable domestic gas prices. Many of the regasification terminals built in anticipation of increasing LNG imports now sit idle, as North American producers look on enviously at global LNG prices. However, several Gulf Coast and eastern seaboard LNG facilities are plotting major investments to add liquefication capacity to allow domestically produced gas to be exported to Europe and Asia. So is the US shale revolution about to go global? At first glance the economics look overwhelmingly compelling but there are still significant obstacles that need to be overcome.
In this article we give an overview of the potential export projects and explore some of the regulatory hurdles facing them. This will be followed shortly by an analysis of the economics of North American LNG exports and potential impact on the global gas market.
In 2010 an LNG cargo that had been unloaded and intended for the US market was reloaded and sent to Europe by Centrica to capture a higher margin. While this was not an export of domestically produced gas, it helped raise the profile for the prospect of significant volumes of LNG being exported. Less than two years later there are now nine credible projects with plans to add liquefication capacity to existing regasification terminals. The volumes of the competing projects are significant, having a combined capacity with the potential to supply 25% of European demand or export over 15% of all North American production.
Table 1: US and Canadian LNG Export projects
Source: The impact of a globalising market on future European gas supply and pricing, Howard Rogers, OIES, Jan 2012.
The challenge for the developers will be to successfully navigate their way through the complex approval and permitting processes. There are effectively three elements:
- Federal Energy Regulatory Commission (FERC) has authority under the Natural Gas Act to approve the location of and health and safety related aspects of LNG facilities
- Department of Energy (DOE) grants approval to export natural gas to both free trade and non-free trade countries. The DoE assessment is based on a broad assessment of the economic impact of the proposal
- There are also a series of approvals required at a state level which effectively allow a state veto over proposals
After each approval is granted, opposition groups have various avenues open to them to get the project delayed or even cancelled (for example, they can petition the FERC to revisit the approval or challenge the decision in the Federal Court). To date the DOE has only granted one approval (2.2 bcf from Cheniere Energy’s Sabine Pass facility) to export LNG to countries with which the US has a Free Trade Agreements (FTA) in place. Very few LNG importing countries currently have a FTA in place with the US which provides a key sticking point for the prospects for LNG exports.
If the DoE insists on restricting exports to FTA countries, the status of the various FTA negotiations could exert a significant influence over the global gas market. The UK and Germany have recently made comments supporting a proposed FTA between the European Union and the US. This could have the effect of creating a partial fragmentation of the global gas market with the US supplying significant volumes to Europe whilst other LNG producing countries focus their efforts on selling into the Asian market. The approval process for Canadian projects is likely to be less onerous as they are less likely to meet such vocal opposition to those in the US.
There is little prospect of all these projects going ahead and as such there will be significant first mover advantage. Although, all projects are at a broadly similar stage, probably the most advanced is Cheniere’s Sabine Pass project. It has been granted DoE approval, and is in the process of applying for FERC approval and has recently signed a long term sale of liquefication capacity to BG, the first such contract of its type.
Opposition to the export projects is centred around the prospect of the US losing its natural gas self sufficiency and the associated risk and cost to the wider economy. This will manifest itself through the change to domestic gas pricing dynamics. US gas prices have been relatively low and stable since the US stopped importing significant volumes of LNG. These market conditions have no doubt been a boost to the US economy, particularly manufacturing, and will have shielded it from the current global economic turmoil to some degree. The logical outcome of any significant volume of LNG exports is price convergence, less processing and transportation costs, with destination markets. Under this scenario, US gas prices will rise and potentially become more volatile as the domestic market is directly influenced by global events (e.g. via the changing economics of LNG flows in response to changes across the Asian, European and American LNG markets). In fact, the US Energy Information Administration (EIA), the analysis division of the DoE, recently suggested that LNG exports may increase domestic gas bills by up to 9% by 2035. One of the key challenges for opponents in the US is that project developers can point to the fact that DoE currently allows gas to be exported to Canada and Mexico where it could be liquefied and exported, thereby neatly side stepping the need for approval in the US.
The prospect of higher and more volatile gas prices and the potential cost to domestic demand and the wider US economy has lead to growing opposition to the LNG export projects from many politicians and lobby groups. In essence the debate distils down to one of protectionism versus free market liberalism. While the US has historically taken its energy security very seriously, it seems a somewhat contradictory policy to place restrictions on LNG exports when its diplomats are travelling the world petitioning for FTAs. Ultimately, project economics, and how they are influenced by global gas markets, are likely to drive investment decisions and the extent to which the export capacity is utilised. We will be exploring this topic in a follow up article in the coming weeks.