Using its proprietary Global Gas Model, Wood Mackenzie has undertaken sensitivity analysis to determine the outlook for US liquefied natural gas (LNG) exports. Contrary to mounting speculation over the impact of Russian action to protect market share, Wood Mackenzie’s analysis reveals that other factors may be more influential. These include US gas prices, which are forecast to rise from recent levels, and the price of oil and coal, which will determine European spot prices through coal-gas switching in the power sector.
Stephen O’Rourke, research director of global gas supply for Wood Mackenzie, comments, “With European LNG imports, including from the US, set to grow over the next five years, there is much speculation about Russia’s likely response. Will Russia’s gas strategy mimic that of Saudi Arabia’s oil strategy, and will it seek to retain market share in Europe, pushing European gas prices to levels that force the shut-in of US LNG exports?”
Wood Mackenzie asserts that US LNG export utilization will be determined by multiple factors and that a large proportion of export volumes will be under threat at times over the next five years.
Noel Tomnay, head of global gas and LNG research for Wood Mackenzie, says, “Our analysis shows that, while Russia's export strategy is important, ultimately US LNG export utilization will be influenced more by the price of other commodities: of US gas and oil, and, particularly, of coal, which will determine European spot prices through coal-gas switching in the power sector.”
O’Rourke explains the analysis: “Using our Global Gas Model, we explored the impact of three determinants on US LNG exports: Russia’s gas export strategy, oil price, and coal price. This addressed questions such as: What if coal prices remain low? What if oil prices don’t rebound? What if Gazprom increases or decreases exports?”
O’Rourke explains the findings of these sensitivities: “Should oil prices remain low, Russian oil-indexed contract gas will remain cheap and buyers will maximize their offtake of Russian gas. At low oil prices, customer choice rather than strategic Russian decision making would allow Russia to retain more than 30% of the approximate 490 billion-cubic-meter (bcm) European market and threaten US LNG export volumes. If coal prices also remain low, monthly European gas prices could fall to US$3.85/MMBtu, and utilization of US LNG export capacity could average 85% between 2017–2020.”
So what if the oil price was to rise? “Russia’s share of the European market stands to decline to only 25% if the price of oil and Russian contract gas rise. Russia could elect to make more pipe gas available at spot prices and increase market share to as much as 35%, but, in so doing, European spot prices could fall toward US$3/MMBtu for longer periods,” O’Rourke comments.
Wood Mackenzie says that such a market share strategy could reduce US LNG export utilisation to some 40% and would send a strong signal to deter developers of future US LNG export projects. But, while it could maximize profitability for Russia under some oil and coal price combinations, it seems an unrealistic outcome.
“In addition to undermining existing contractual supply agreements, securing additional pipeline access for export volumes would require the tacit support of Ukraine and the EU, a dependence that appears politically challenging,” O’Rourke continues.
Looking at the outcome of the sensitivities, Tomnay concludes, “Russia's export strategy will be a key determinant of US LNG export capacity utilization, but the Russian pursuit of European market share to drive out US LNG from Europe seems either uneconomic and/or impractical under different external conditions. Instead other factors such as the price of US gas, oil and European coal prices will likely be greater determinants of US LNG export capacity utilisation. Subject to these factors alone, average utilization of US LNG export capacity between 2017–2020 could vary from 54–100%. For US LNG exporters, the best thing to happen would be for global coal prices to rise, or for US gas prices to stay low.”