Stratas Advisors is a Hart Energy company. Tom Campell is director of LNG and gasification.

Much has been made of the potential risk to LNG projects around the world since crude oil pricing began its steep decline. This concern is tied to projects whose contracts are based on crude oil pricing, as is common in premium Asian markets. Pricing for these contracts is typically unconnected to production costs, and is instead based on the price of crude oil delivered to these markets.

For many Australian LNG projects nearing completion, a steep decline in revenue coming on the heels of serious cost-overruns may portend challenging years. Meanwhile, some Western Canadian projects that have pursued the same oil-indexed pricing structure now must contend with a reduced financial incentive. The recently announced postponement of a final investment decision for Petronas’ Pacific Northwest LNG is unlikely to be the last time a Western Canadian project is forced to confront current harsh economic realities.

In spite of growing challenges to their Northern counterparts, many U.S. project developers have been quick to tout their ability to avoid the current challenge with oil-indexed pricing. Thanks in part to the presence of a robust gas transmission system, U.S. developers have focused their efforts on offering clients contracts with pricing based on domestic gas indexes. These prices are based on commodity natural gas prices, to which are then added additional fees for liquefaction (typically in the $2 to $3/MMBtu range), transport and more. Under this logic, so long as natural gas remains cheap domestically and expensive abroad, LNG suppliers will retain a strong opportunity regardless of movements in crude oil.

Since 2006, production from shale gas formations has not only supplanted declining production from conventional gas wells, but also helped grow overall production.

Unfortunately, this logic fails to grasp the realities of current U.S. natural gas production. Since 2006, production from shale gas formations has not only supplanted declining production from conventional gas wells, but also helped grow overall production. However, a fairly consistent piece of the current market remains production of associated natural gas. As of 2013, associated gas production made up some 18% of total U.S. natural gas production. This associated gas production remains inherently tied to oil production. Therefore, as total oil production begins to taper off in the current low oil price environment, associated gas production is also endangered.

While it’s highly unlikely these volumes would be completely eliminated, if one ignores these volumes, current total natural gas production would be closer to pre-2009 levels. During this time and the preceding years, natural gas prices at Henry Hub averaged closer to $6 per MMBtu, if not more.

Moreover, this potential decline in production would occur at the exact time when numerous gas-consuming projects would come online. These include already under-construction LNG export projects such as Cheniere’s Sabine Pass facility, which is targeting completion by the end of 2015. These facilities join a new wave of petrochemical facilities, pipelines to Mexico and growing demand for natural gas in the power sector.

All of these new demand sources are likely to help drive the price of natural gas upward despite its current depressed price. With spot pricing for LNG into Japan at roughly $10/MMBtu, if higher domestic gas prices are added to liquefaction and transportation fees, U.S. LNG quickly loses its economic viability.

With many U.S. projects using a tolling model for their contracted volumes, those with contracts already secured have little need for concern. However, a decline in the price of LNG in Asian markets caused by falling crude oil prices coupled with a rise in U.S. gas prices may harm the previously robust economic opportunity associated with U.S. LNG exports.

Buyers going forward may be less inclined to push for new contracts for U.S. volumes, thus threatening dozens of projects that have yet to secure contracts for their volumes.

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