Profits from selling U.S. liquefied natural gas abroad may be elusive, belying the $60 billion race for export licenses as the price gap between Asia and North America shrinks from record levels.
The difference between U.S. and Asian gas is poised to drop by more than 60 percent by 2020, leaving exporters facing a loss of as much as $6 million per tanker, according to calculations by Bloomberg based on data from Rice University in Houston. The U.S. share of the global LNG market will be in “single digits,” according to Royal Dutch Shell Plc, which has stakes in more than 25 percent of the world’s liquefaction capacity.
As many as 16 applications for LNG export projects from Texas to Maryland and Oregon are being considered by the U.S. Department of Energy as companies look to follow Cheniere Energy Inc. in exploiting record price differentials between the U.S. and Japan, the world’s largest consumer. Buyers from Tokyo to London are seeking supplies in the U.S., where prices are less than a third of those in Europe and a fifth of Asian costs.
“The idea that the world will be flooded with spot LNG is not going to happen,” said Frank Harris, global head of LNG at Wood Mackenzie Ltd. in Edinburgh. “Returns are already getting squeezed. By the end of the decade, the LNG market looks better supplied, and spot cargoes from the U.S. won’t necessarily look so attractive.”
U.S. natural gas has risen 71 percent from a decade-low in April to $3.246 a million British thermal units in electronic trading today on the New York Mercantile Exchange. U.S. exports to Asia would help damp the Platts Japan-Korea Marker, a daily price assessment of Asia-bound LNG known as JKM, to a mean of $8.08 through 2020, from $17.80 yesterday, Rice University’s James A. Baker III Institute for Public Policy said in a study.
The average cost of shipping U.S. natural gas to Japan will be $9.05 from 2011 to 2020, assuming a U.S. price of $3.98, leaving a loss of $0.96 per million Btu taking into account the costs of transportation and liquefaction, the study shows.
Losses widen to $1.77 per million Btu in the decade to 2030 as the price at Louisiana’s Henry Hub, the U.S. benchmark, rises to an average $4.69 and the JKM falls to $7.98, according to the study, published Aug. 10.
The loss to the U.K. is $0.49 through 2020 and $1.23 from 2021 to 2030. U.K. next-month gas, the European benchmark, today rose 0.1 percent today to the equivalent of $10.86 on London’s ICE Futures Europe exchange.
“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.
“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.
Main Pass Energy Hub LLC applied in September for authorization to export 3.22 billion cubic feet of natural gas a day, or 23.5 million tons of LNG per year, from a site 16 miles off the Louisiana coast, according to the Energy Department’s website. Gulf Coast LNG Export LLC in January 2012 requested permission to build a 2.8 billion cubic feet LNG terminal at the Port of Brownsville, Texas.
In total, 29.21 billion cubic feet a day of projects have applied for licenses to export LNG, according to the Energy Department. Assuming investment costs similar to those at Sabine Pass, they have a value of almost $60 billion.
Half of North America’s 120 million tons a year of LNG export potential will be built, Andy Brown, upstream director at Shell, the world’s largest shipping operator of the fuel, told reporters On Dec. 5. The U.S. share of the global LNG market will be “modest,” he said.
The world’s biggest LNG tankers, known as Q-Max vessels, can carry as much as 122,000 tons of the liquid fuel, or about 6.3 trillion Btu of natural gas.
All outstanding applications were waiting until after a Department of Energy report into the probable effect on domestic prices published on Dec. 5. Exports would have “net economic benefits” for the U.S., according to the study, written by NERA Economic Consulting.
While U.S. regulators decide how much gas they are prepared to send overseas, export projects are coming online from Australia to Angola. Some 221 billion cubic meters of annual liquefaction capacity will be added to the 413 billion currently in existence over the next four years, according to Barclays Plc. Of that, 115 billion will come from Australia.
U.S. natural gas prices will rise to $4.80 and $8.70 per million Btu by 2035 with a reference case of $6.30, according to the NERA study. The price increases by 14 percent above the base case by 2020 and 6.4 percent by 2035 assuming low expansion of LNG exports. Under a high and rapid expansion scenario, the increase will be 20 percent by 2020 and 14 percent by 2035.
Long-term buyers of U.S. LNG who invest in shipping and liquefaction infrastructure may be able to make significant savings, according to Jonathan Whitehead, global head of commodities markets at Societe Generale SA in London.
“It’s completely different economics for spot versus long- term contracts,” he said. “A spot-shipping rate of $3 to Japan from the U.S. Gulf coast is probably true, but over 20 years it’s probably $1 and a bit. Liquefaction might be $2.”
Korea Gas, the world’s biggest LNG-buying company, agreed last January to buy LNG from Sabine Pass based on Henry Hub prices. The contract may help the utility pay 30 percent less than supplies in Asia, which are traditionally indexed to oil, the state-owned company said in April. Exports to Asia would cost $9.35 per million Btu, based on a Henry Hub price of $3, Cheniere said last year.
The introduction of contracts linked to Henry Hub instead of crude will help speed a move away from oil indexation, according to the Oxford Institute’s Henderson.
“Even if the volumes of North American gas that actually arrive in Asia and Europe are relatively small, their impact on prices and price formation across the globe could be significant and long-lasting,” he said.