By Karen Boman
Long-term growth in international gas demand will provide a market for the anticipated wave of liquefied natural gas (LNG) exports from the U.S., according to a recent report by Barclays Capital.
Barclays cited gas demand forecasts by the International Energy Agency, which anticipates growth of 1.7 percent each year until 2035, and ExxonMobil’s most recent energy outlook, which sees gas demand rising by 1.9 percent per year during the same timeframe.
Gas demand is expected to be particularly strong in Asia Pacific and Europe, Barclays noted in its U.S. Oil Services and Drilling 2012 Outlook, adding that most proposed LNG export facilities in North America are targeting demand growth in Asia.
The U.S. Energy Information Administration expects average growth in gas consumption in OECD [Organisation for Economic Co-operation and Development] Asia at 1 percent per year from 2008-2035 and, for non-OECD Asian countries, 3.9 percent per year.
Short-term gas demand has spiked as Japan has increased its gas consumption due to lost Fukushima Daiichi power reactor capacity. Chinese gas consumption also is expected to triple during the decade as the nation’s government promotes the use of natural gas.
Barclays also believes that gas demand in India, which currently is greater than production levels, will be great enough to draw LNG imports, despite anticipated increases in domestic supply in the coming years.
A number of LNG export projects have been proposed for Western Canada, while in the U.S., proposals have been made to convert underutilized LNG import facilities in the U.S. to liquefaction and export facilities. These projects are expected to come online between 2014 and 2016.
“However, there are a number of LNG projects currently operating or under consideration internationally that would compete with exports from the U.S.,” Barclays commented, adding that a number of new countries have begun exporting LNG in the past two years, including Brazil, Argentina, Chile and Kuwait.
Twenty-three projects also are under consideration in Angola, Algeria, Australia, PNG, Indonesia, Russia, Libya, Nigeria, Equatorial Guinea, and Peru.
Impact of U.S. LNG Exports on Gas Prices Can Be Mitigated
U.S. LNG exports are expected to have a modest impact on U.S. natural gas prices – with an even smaller impact on U.S. electricity prices — according to recent analysis by Deloitte MarketPoint, a decision point solutions company focused on fundamental market analysis and price forecasting.
Deloitte concluded that LNG exports of 6 Bcf/d from the U.S. will have a weight-averaged price impact of $.12/MMBtu on U.S. natural gas prices from 2016 to 2035.
Deloitte’s findings are based on its application of its integrated North American Power, Coal, and World Gas Model (WGM) to analyze the price and quantity impacts of LNG exports on the U.S. gas market.
Study authors Roger Ihne and Tom Choi said the study’s findings dispel concerns that LNG exports will cause U.S. gas prices to trade at global price levels, noting that the volume of LNG exports, as well as the high cost of LNG exports, is inadequate to cause U.S. prices to trade at global price levels. They also concluded that the relatively low volume of LNG exports from the U.S. is unlikely to cause significant change in U.S. price volatility.
Ihne and Choi compared the WGM’s existing model and assumptions, or Reference Case, with a second case, the LNG Export Case, which represents 6 Bcf/d of LNG exports, the same volume of the three LNG export applications at Sabine Pass, Freeport, and Lake Charles LNG terminals.
“Since the WGM already represented these import LNG terminals, we only had to represent exports as incremental demands, each with a constant of 2 Bcf/d demand, near each of the terminals,” the study authors said. Deloitte compared results of this second case to the Reference Case, and projected how much the exports would increase domestic prices and affect production and flows.
This increase represents a 1.7 percent increase in the projected average U.S. citygate gas price of $7.09/MMBtu over this time period. The projected impact on Henry Hub price is $.22/MMBtu, significantly higher than the national average because of its close proximity to the prospective export terminals.
However, Deloitte found that projected price impacts diminish for markets farther away from the U.S. Gulf Coast with project price impacts less than $.10/MMBtu for markets such as Chicago and New York.
“Focusing solely on the Henry Hub or regional prices around the export terminals will greatly overstate the total impact on the U.S. consumers,” Deloitte concluded.
The findings show that the North American gas market is dynamic, Ihne and Choi said. While short-term markets have supply and demand that are largely fixed, both supply and demand are far more elastic in the long term outlook, with LNG export projects likely to be backed by long-term supply contracts as well as long-term contracts with buyers.
“If exports can be anticipated, and clearly they can with the public application process and long lead time required to construct a LNG liquefaction plant, then producers, midstream players, and consumers can act to mitigate the price impact,” Deloitte commented.
Ihne and Choi dispelled skeptics’ assertions that the rapid growth in shale gas production in recent years, which has expanded U.S. gas supply and prompted proposals to convert existing LNG import terminals into export facilities, would not continue.
They noted that abundant shale gas resources and commitment by energy majors to develop these reserves will likely ensure strong future growth of shale gas production. “Although tighter regulations might impose additional cost to shale gas development, it is unlikely that they would kill shale gas growth,” the study authors commented.
“The projected volume of LNG exports is insignificant compared to total U.S. resource potential,” the authors said, adding that the volume of exports will not decrease U.S. energy security and are not inconsistent with the U.S. policy of energy independence.