U.S. LNG Exports Likely to Play Larger Role in Supplying Europe vs. Asia

The U.S. will not likely become a major supplier of liquefied natural gas (LNG) to Asia due to distance, but could become a significant LNG supplier for Europe, said industry officials at the Mayer Brown Seventh Annual Global Energy Conference in Houston on Wednesday.

The U.S. shale gas boom, which has depressed U.S. natural gas prices, has also transformed the United States from a market for LNG imports to a potential LNG exporter.

A number of U.S. LNG export terminals are expected to come online along with projects in western Canada and Australia in the 2016-2018 time frame, said Toshi Yoshida, a partner in Mayer Brown's Global Energy practice.

Australia has advantages as an LNG exporter to Asia in terms of proximity, its long-term relationship with Asian countries and as a political stable source of LNG. Western Canadian LNG export facilities such as Kitimat offer similar advantages in terms of distance and political stability, Yoshida said.

Many U.S. LNG facilities are disadvantaged geographically as Asian sources of gas due to their locations on the Gulf of East coasts, but offer the advantage of cheaper Henry Hub gas prices.

"U.S. LNG exports will not be a major supplier, but will play a role," said Yoshida.

Daryl Houghton, manager of LNG consulting with Poten & Partners, said U.S. LNG exports could comprise 30-40 million tones of the 300 million tonnes of Asian energy demand in 2030.

Despite the distance, Asian LNG buyers will continue to flock to the United States and to other potential sources of LNG as a source of diversity for their portfolios. The United States also offers a less volatile, long-term supply source.

"The main issue I see – and this will not happen in my lifetime – is the gaps between Asian LNG and Henry Hub prices," said Houghton. While some shorting of the distance between prices may occur, a difference in prices will always be present because the markets are so different, Houghton noted.

Europe may struggle to meet its energy demand as gas supplies are expected to tighten in the next few years and gas demand grows due to switching from nuclear to gas, said Stuart McAlpine, a partner with Mayer Brown's Global Energy practice.

The situation has created "the perfect storm" with UK production declining, LNG deliveries being diverted to Asia and Gazprom's hold on the European gas market adding to the energy security and supply question in Europe.

As Europeans dash for gas, the question of where it will come from remains, said McAlpine, with questions remaining over whether Europe's shale gas can be exploited.

"Despite weakness in the European economy, gas will play a role in Europe's energy mix," McAlpine said.

After a decade-long shortage of LNG supply, the market will change after 2017, when a number of LNG projects come online worldwide. Houghton doesn't see a glut of LNG occurring, but some downward pressure on prices will likely occur.

The prospect of U.S. LNG exports has raised concerns that exports will push U.S. natural gas prices higher, hurting consumers and industry. A U.S. Department of Energy report indicated that U.S. LNG exports would result in higher U.S. gas prices.

However, a report released in December 2011 by Deloitte said exports would have a modest impact on U.S. gas prices.

The U.S. shale gas boom not only transformed the United States' status as a destination for LNG imports, but is affecting global geopoliticals and business models, limiting Gazprom's role as a petro-power over Europe and enabling the liberalization of gas markets in Europe and elsewhere, said Amy Myers Jaffe, director of the energy forum at the Baker Institute at Rice University and associate director of the Rice Energy program.

The shale revolution also prompted Argentina's nationalization of YPF assets as information about the size of the nation's shale gas potential came to light and the amount of resources it would lose to Spain's Repsol, Jaffe said.


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