US LNG Exports Could Speed Transition from Oil Price Indexing

Liquefied natural gas (LNG) exports from the United States could speed up the transition from oil price indexation of natural gas supply contracts, according to the findings of new Deloitte study of the impact of U.S. LNG exports.

Decoupling from oil-indexed prices is already taking place in some European markets and could occur in some Asian markets, particularly with the anticipated growth in Australian LNG exports. If Asian markets decouple from oil-indexed prices, their prices could decline sharply over the next several years, according to the Deloitte MarketPoint report.

The report focuses on the winners and losers in the anticipated wave of LNG exports expected to flow from the United States between 2016 and 2030. In the study, Deloitte examines the incremental impact on the global LNG market of 6 billion cubic feet per day (Bcf/d) of LNG exports from the United States under two hypothetical market scenarios – one in which oil-price indexation continues over the long-term, and the second scenario, a competitive response which assumes increasing competition from newer supply sources will change the pricing of LNG volumes.

Each market scenario analyzed the impact of U.S. LNG exports either to Asia or Europe, with 2 Bcf/d each to Japan, South Korea and India or 3 Bcf/d each to the UK and Spain.

"Much attention has been paid to the impact of U.S. LNG exports on the U.S. market, but not much study has been done on the global impact," said Tom Choi, natural gas market leader for Deloitte MarketPoint and co-author of the report, at a Tuesday media briefing in Houston.

This prompted Deloitte to try and quantify the global impact of U.S. LNG imports.

From 2016 to 2030, average U.S. LNG prices are expected to rise about $.15/MMBtu while the corresponding price decrease in importing countries could be several times higher. Although U.S. gas prices are expected to rise, global gas prices are expected to fall anywhere from $.40/million cubic feet (Mcf) to $.70/Mcf.

"Furthermore, the interconnectivity of gas markets causes price impacts to be felt globally, not just in the countries importing U.S. LNG," said Choi. "Since supplies for U.S. LNG exports are expected to be pegged to U.S. gas prices rather than oil prices, the incremental volumes could result in global gas markets transitioning more rapidly to prices set by 'gas-on-gas' market completion."

Calls for the United States to limit the level of U.S. LNG exports are unwarranted, since the narrowing of the price difference between the United States and export markets will likely limit the volume of economically viable U.S. LNG imports, said Choi.

U.S. LNG exports also could displace oil consumption through increased gas-fired electric power generation. Lower gas prices could provide incentive for more countries to switch to gas-fired electric power, said Choi. As much as 5 million barrels a day worldwide could be displaced, according to the study, which would also provide environmental benefits through lower carbon emissions.

While the United States and allies such as Japan, Germany and the UK will benefit, countries such as Russia - a significant exporter of natural gas to continental Europe -and countries such as Iran and Venezuela, which aren't exporting LNG but have the potential to do so, will be negatively impacted, said Peter Robertson, independent senior advisor to Deloitte LLP's oil and gas group.

Countries that import LNG will benefit in terms of lower prices, while traditional exporter countries will take a hit in terms of volume and prices, Robertson noted.

"While the price impact in the U.S. is projected to be fairly minimal because of the large size of the North American resource base and responsiveness of the U.S. gas market to price signals, the global impact could be more than what the relative size of 6 Bcf/d of exports might indicate," Deloitte noted in the report. "Because of the embedded take-or-pay volumes in long-term gas supply contracts and limited regional production in many parts of the world, U.S. LNG exports could reduce global prices and cost of supplies for gas importers."

The entry of new supply "clearly benefits consumers" but negatively affects suppliers through price reductions and/or direct displacement of their export volumes.

"Even if gas supply in a region is not directly displaced by U.S. LNG exports, its producers might suffer decline in revenues due to lower prices affecting the region," Deloitte noted.

Gas-exporting countries could also face increased pressure to adopt market-based gas prices in place of oil-indexed prices.

Given the relatively small size of the LNG market, Deloitte's World Gas Model forecasts more displacement of non-LNG supplies than of LNG supplies to occur. Furthermore, most LNG supplies are tied up under long-term contracts with minimum-take volumes.

"If U.S. LNG is exported to Asia, the displaced volumes that are LNG supplies are about 30 percent of the total displaced supply," Deloitte said in the report. "If U.S. LNG is exported to Europe, the displaced volumes that are LNG supplies are a little less, about 25 percent of the total displacement. The results make sense given the higher portion of Asian supply portfolio captured by LNG."

The largest LNG source displaced by U.S. LNG exports is Australian LNG due to its high supply costs, particularly from coalbed methane projects and distance from global markets. Australian LNG makes up nearly 20 percent of the total displaced volumes by U.S. LNG exports to Asia and 10 percent with exports to Europe. However, Australian LNG is still expected to grow rapidly, becoming the global leader in LNG production even with U.S. LNG exports.

Asian gas sources, primarily indigenous production in China and India, are forecast to bear about 40 percent of the total volume displaced by U.S. LNG exports to Asia. While China and India both have significant conventional and unconventional gas resources, the production costs for these resources is estimated to be quite high, Deloitte noted. Although U.S. LNG exports to Asia do not directly displace projected supplies from Russia, the Caspian and the Middle East, they are forecast to cause a global rebalancing of gas supplies as supplies displaced from Asia are diverted to European markets, which displaces Russian gas imports. In the case of U.S. LNG exports to Europe, less displacement of LNG supplies would occur while more domestic and gas pipeline imports are displaced.

"The reason is simple: Europe imports far less LNG to meet its demand than does Asia," Deloitte noted. "If U.S. exports are sent to Europe instead of Asia, there is less displacement of Australian LNG and more displacement of African LNG, which includes supplies from Algeria, Egypt, Nigeria, Equatorial Guinea, and new supplies from Mozambique and Tanzania."

The study marks the third study conducted by Deloitte in the past 18 months on the global gas market. The previous two studies focused on the impact that increasing shale and tight gas production would have on U.S. natural gas prices and the impact on U.S. natural gas prices if the United States exported as much as 6 Bcf/d.

The third study assumes no Canadian LNG exports will occur to isolate the impact of U.S. LNG exports. In reality, U.S. and Canadian LNG exports will likely compete against each other to some degree, and the impact of U.S. LNG exports would be partially mitigated by offsetting actions from Canadian exporters, Deloitte noted.

Robertson noted that the market would determine what LNG export projects are constructed on Canada's West Coast, noting it was unlikely that all of the currently proposed projects would be constructed.


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Lars Petter Blikom  |  January 10, 2013
Interesting that they foresee a market "balancing" where the low price market remains low (only the slightest increase) while the high price market drops significantly. I assume that kind of projection is only possible if you assume close to unlimited supply in the low price market. Which I do not believe is the case, as I explained in this blog post a few weeks ago: