To Help And Hinder

Exporting a set amount of liquefied natural gas (LNG) abroad would help the U.S. and its friends, but could hurt countries with strained U.S. relations, according to a team of Deloitte energy experts.

“The U.S. economy benefits from the U.S. exporting LNG, but the foreign economies that benefit tend to be U.S. allies,” said Peter J. Robertson, independent senior advisor to Deloitte’s oil and gas group. Robertson was speaking during a briefing of Deloitte’s recently-released report that studies on the global impacts of LNG exports from the U.S.

“The Europeans, the Japanese, all of those folks are highly dependent on importing natural gas, either by LNG or by pipeline. The people who don’t benefit quite as much are the Russians, who obviously are the major exporters to continental Europe, and in the future, perhaps some of the companies that aren’t exporting LNG today like Iran and even Venezuela.”

The Deloitte report studies the incremental price impacts, supply changes and flow displacements that might come as the result of U.S. LNG exports to Asian or European markets. The report presents two market scenarios. One involves exporting 6 billion cubic feet (Bcf) per day to Asian countries, including Japan, South Korea and India. The other presents a case for European exports (3 Bcf per day would be delivered to Spain and an equal amount would be exported to the U.K.). The scenarios are based on the 2016 to 2030 time frame.

Ultimately, said Robertson, it’s the importing countries that would benefit from U.S. exports, since global prices would go down as a result. The traditional exporters, meanwhile, would be hurt directionally by more competition.

“Russia is still going to be exporting gas and Australia is still going to be exporting gas, but this 6 Bcf a day has got to come from somewhere,” said Robertson. “And so somebody is going to export less than they would have had the U.S. not been an exporter and, in many ways, the traditional exporters are the folks who may take a hit, both on volume and on price.”

Market impacts

According to the report, LNG prices are projected to decrease fairly significantly in regions importing U.S. LNG, but would be expected to only marginally increase in the U.S. The impact on U.S. city gate prices will be on average $0.15 per MMbtu from 2016 through 2030, the report says. The impact will be mitigated by a large domestic resource base, the interconnectivity of the North American gas market and the ability of the industry to anticipate and make supplies available, said report co-author Tom Choi.

The impact on LNG importing countries is significantly greater, he added, since those regions have smaller markets and insufficient supplies to mitigate price impacts.

“Another result we found is that the price impact is not felt only in the countries that import LNG, but also globally,” said Choi, natural gas market leader for Deloitte MarketPoint LLC. “Because of the high cost of gas transportation, we don’t see a global gas price ever evolving. But we do see greater linkages among these markets with the growth in LNG trade and increased export pipelines. If the U.S. exports to Japan, for example, it’s going to impact price in the U.K. and vice versa.”

U.S. LNG exports could also have an impact on world oil markets. The report says that some oil consumed for power generation could be displaced through increased gas-fired electric power generation. It says the potential for oil displacement in electric generation could be as high as 5 million barrels per day globally.

“Why is this? Perhaps it’s not because gas isn’t used (in countries where oil will be displaced), but because there aren’t supplies available,” he said. “LNG exports could make these supplies available. Secondly, it could be because gas and oil are priced on a parity basis, so there is really no incentive to use one over the other. With LNG exports lowering the price of gas globally, that would incentivize a switch to gas-fired generation.”

Canadian rival?

Greg Haas, Hart Energy’s research manager for integrated oil and gas research, noted that Deloitte’s study ignored LNG exports from Canada. Hart Energy’s North American Shale Quarterly (NASQ), for which Haas is the lead author, projects natural gas output from five major active western Canadian shale plays will nearly equal the 13 Bcf per day projected and combined 2030 output of the U.S. Gulf Coast’s Haynesville/Bossier and Fayetteville shale plays. Much of that gas is targeted for LNG export from proposed Gulf Coast LNG plants, including the Sabine plant in Cameron Parish, Louisiana, under construction by Cheniere Energy Inc.

Most countries importing gas have longstanding trade relations with the U.S., Deloitte notes. However, some exporting countries have “more challenged” relationships with the U.S.

“Canadian shale gas could rival U.S. shale gas in productivity, and Canadian LNG exports could further dampen U.S.LNG exports and any domestic price runs,” Haas said, referring to NASQ.

Deloitte’s Peter Robertson added that “there’s a natural limit to how many LNG export facilities will be built. Nobody is going to build an LNG plant until they have real customers. I think it is hugely unlikely that all the announced projects are going to be built. The reality is that they have to have customers. The market will help figure this out.”

According to the BP Statistical Review, the top natural gas exporting country of 2011 was Russia with 18.5 Bcf per day, followed by Qatar at 11.8 Bcf per day and Norway at 9.4 Bcf per day. The top importer of 2011 was Japan at 10.3 Bcf per day, followed by Germany with 7 Bcf per day and Italy with 6.7 Bcf per day.

Things are looking promising for U.S. LNG exports. Late last year, a Department of Energy-commissioned study endorsed the approval of U.S. LNG exports. “Benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers,” reads the report by NERA Economic Consulting.

So far, the Sabine Passproject is the only U.S. project to clear all regulatory and permitting requirements, but Macquarie Energy expects that more LNG will hit the market by 2020. The U.S. is expected to begin exporting LNG in 2016, once the Sabine Pass LNG facility goes into production.

Michelle Thompson can be reached at mthompson@hartenergy.com or 713-260-1065.