U.S. LNG profit seen elusive as price gap closes

Domestic Use

“Applications for export licenses are around 29 billion cubic feet a day,” Kenneth B. Medlock III, the study’s author, said from Houston. That’s equivalent to about 48 percent of domestic consumption in October, according to the Energy Department. “I doubt we’ll see more than 6 billion,” he said.

The economic rationale for delivering LNG to Asia would be significantly diminished at a U.S. price of about $6 per million Btu, while in Europe it disappears at about $5, according to James, Henderson, a research fellow at the Oxford Institute for Energy Studies.

Interest in U.S. LNG exports blossomed in recent years as growing supplies of gas from previously inaccessible shale rocks and the fourth-warmest winter on record cut Henry Hub prices to a 10-year low of $1.902 per million Btu on April 19 from as high as $13.69 in 2008.

The average Japanese LNG price was $16.92 in 2012 to October, peaking at $18.07 in July, according to data from the nation’s Finance Ministry. Prices soared from a mean of $9.04 in 2009 as utilities were forced to switch to natural gas in the wake of the March 2011 Fukushima nuclear disaster that led to the temporary closure of all the nation’s reactors.

Price Gaps

“The arbitrage opportunity that is driving actors to seek export permits and licenses for new liquefaction facilities is based on current price differentials,” said Iain Grant, a manager of special projects at Athabasca University in Canada who has written about the political economy of natural gas trading.

“But should we expect either the low Henry Hub prices or the high Japanese prices to last long enough to justify the massive effort that is underway to capitalize on it?”

Cheniere, based in Houston, is investing about $5 billion in its 18 million metric ton facility at Sabine Pass in Louisiana, which in April became the first facility in almost half a century to receive approval to export to countries that the U.S. doesn’t have a free trade agreement with. Shipments are scheduled to start in late 2015 with 11 percent of capacity available to the spot market and the rest tied up in long-term contracts with Korea Gas Corp., GAIL India Ltd. and BG Group Plc.

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