Today’s lower prices don’t doom future US LNG exports, panel says

Depressed natural gas prices now aren’t likely to affect future US LNG exports much because most projects won’t go into operation until 2020 when global markets have improved, speakers at an Atlantic Council (AC) forum agreed.

“There are some quite strong headwinds against the LNG industry at this time,” conceded Bud Coote, a retired Central Intelligence Agency energy analyst who now is a senior fellow at AC’s Global Energy Center. “Gas demand growth is down. Prices are much lower than in previous years when most of these projects were approved and launched. Japan’s nuclear industry has been rehabilitated after the Fukashima disaster and is coming back online.

“But there also are positive trends,” Coote said. “Demand growth has slowed, but it’s still growing. Gas probably will get a boost from the Paris climate conference, especially if governments adopt policies that promote its use. Pollution is a concern in China and India, where demand for gas is likely to grow.

“We’re seeing more LNG use in vehicles and other transportation, especially in shipping. It’s the fastest growing gas demand sector globally, although it’s still quite small,” said Coote, who wrote a report, Surging LNG Trade: How US Exports Will Benefit European & Global Gas Supply Diversity, Competition & Security, which AC launched at the Feb. 8 event.

The best news for US LNG exports is the close match of the European Union’s supply diversification goals with US potential, he said. “[The EU] will be coming out with several new proposals for new gas policies and regulations to integrate and further diversify Europe’s gas markets in the coming months,” Coote said. “Countries that now are relatively isolated can be helped with more LNG, especially in eastern Europe’s North-South corridor.”

EU policy also is promoting transportation links to countries that need gas most to promote competition as well as security by reducing overreliance on a single supplier, specifically Russia, Coote said. “These countries have already shown that competition can bring lower prices: Seven months before Poland’s LNG terminal began to operate, Gazprom lowered its prices,” he said. “Europe also has considerable unused import capacity in Spain and Portugal, particularly on the Iberian Coast, but there aren’t sufficient pipelines to move it north.”

Europe import demand is high

Coote said while Europe’s gas demand growth rate is “somewhat low,” it’s still high enough to lead the International Energy Agency to forecast the region’s gas imports will likely double by 2020. “It expects Norway’s production to be relatively stable,” he said. “Production in The Netherlands is declining because of environmental constraints the government has imposed. Qatar put a moratorium on additional sales. I don’t think there will be another gas source for Europe until 2020 when the Southern Corridor’s next phase will be completed from Azerbaijan.”

Other panelists generally agreed. “We find ourselves at an extraordinary point in history, with abundant gas resources that we continue to produce expeditiously,” noted Paula Gant, principal deputy assistant secretary for international affairs at the US Department of Energy. “This has led us to consider our possible improvement in relations with overseas customers.”

Gant said, “This has had positive repercussions for energy consumption and security around the world. It also has resulted in more advanced thinking of integrating gas into how we think about handling global climate change. It has allowed us to expand our thinking about what energy security means, as was manifest in the G7 energy principles a year ago that included gas as well as crude oil.”

Gant said the first commercial US LNG cargo to Europe in decades is scheduled to move out of Cheniere Energy Inc.’s Sabine Pass terminal in southeastern Louisiana later in 2016 following a successful initial test shipment in January.

“We’re also seeing small LNG shipments beginning to be exported to Caribbean countries, which as yet don’t have the infrastructure to distribute gas,” Gant said. “This is a completely new dynamic which could help us change how countries there use energy. It also needs to be handled in such a way that our own air, land, and waters are protected.”

Utilities play a big role

Leslie Palti-Guzman, global gas director at the Rapidan Group, noted, “Europe definitely is a place where US LNG will end up. The fact that we’ll see the first commercial shipment of US LNG there in coming weeks is quite a milestone. But suppliers don’t have that much say in where the gas actually is going. A primary buyer can always sell it to a secondary buyer.”

Palti-Guzman said, “There’s a lot of will to diversify sources in Europe. But we in the US don’t seem to consider that countries’ utilities make important decisions too. Although the European Commission has expressed opposition to the North Stream 2 gas pipeline extensions, five countries are supporting it.”

Palti-Guzman said there are several reasons to consider European countries good potential US LNG export destinations, but warned not to simply take this for granted. “There are a lot of headlines about a potential gas price war in Europe. The winner will be the country that can sustain the low prices we’re seeing now,” she said.

“Russia has spare capacity and the political will to export more gas to Europe, particularly since the honeymoon of selling gas to China seems to be over, but it’s not certain how long it could do this because of its not very great economic situation,” Palti-Guzman said. “There also are more cargoes available from Algeria and Trinidad and Tobago. So the US is coming into a crowded space.”

But a fourth panelist said questions have arisen in Asia as well as Europe as plunging crude oil prices to which most LNG contract prices are linked fell below US prices linked to the Henry Hub price. “Prices were high when many of these US projects were conceived,” said Christopher Goncalves, a managing director at the Berkeley Research Group. Now that global crude prices have dropped, Asian and European LNG prices that are linked to them are down by up to 75%, he stated. Shipping charges of $7.50-8/MMbtu also matter, he said.

When Asian customers signed more LNG contracts following the Fukashima nuclear power plant disaster in Japan, they knew they wouldn’t need all of it, Goncalves said. But they also perceived that US contracts with Henry Hub-linked prices are more stable, give them more flexibility on when they take LNG and what they do with it, and provide overseas them price index diversification that gives them more clout when it’s time to renegotiate, he said.

‘An incredible lever’

“US LNG is an incredible lever on prices paid for LNG from other parts of the world,” said Goncalves. “This source of supply has had an incredible impact on world gas markets. Old oil-linked contracts can be replaced with new US contracts. Contracts continue to get signed. One of our clients signed one today with Shell. The party continues.”

Fabrice Vareille, who heads the transport, energy, and environment section of the European Union’s delegation to the US, said the EC’s Energy Union plans to unveil its LNG storage and import strategy on Feb. 10.

“We need to address infrastructure shortcomings,” he said. “Regasification capacity is good already, but there needs to be more access to terminals and more functioning gas hubs. Better interconnectivity and cross-border use of storage also could improve Europe’s gas picture.”

Europe also needs to improve its gas markets and remove barriers, work with the US and other overseas trading partners to promote transparent LNG markets, and promote more use of LNG as a transportation choice in shipping and heavy-duty highway vehicles which use diesel fuel and heavy oil, Vareille said.

“Even though Europe’s energy demand is expected to flatten in coming years, it will continue to be vulnerable in terms of energy supply security,” he said. “Russia, Norway, and Algeria represent about 90% of Europe’s total gas supply. LNG provides new opportunities to make Europe’s gas system more flexible. Access to it could improve various states’ security and make markets more competitive.”

Gant noted, “I think it’s important to look at our relationship with the EU and other countries in trying to develop open and transparent markets. There also has to be confidence that strong US production will continue. Open access to energy markets on both sides of the Atlantic is a vital issue underpinning our discussions.”

Contact Nick Snow at

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