LNG exports boost U.S. natural gas producers (Part 2 of 5)
LNG exports—the world
According to Cheniere Energy, countries from Asia like Qatar (~10 billion cubic feet or bcf per day), Indonesia (3.4 bcf per day) and Malaysia (3.4 bcf per day) are the top countries with natural gas export capacity. Europe has remained the dominant importer for contracted natural gas. For many Asian buyers, there are few alternatives to natural gas sources aside from liquefied natural gas (LNG). Since the top five suppliers of LNG control 66% of the market and Asian buyers favor supply security, long-term contracts linked to oil prices have remained dominant. However, competition from LNG is on the rise and this traditional pricing method is in decline. LNG price now follows natural gas prices more closely.
Natural gas prices in the U.S.
In the United States (Henry Hub) and Australia, natural gas prices trade below $5 per million British thermal units (MMBtu), thanks to the development of shale gas (in the United States) and an abundance of economical reserves. It wasn’t that long ago that the U.S. used to be an importer of LNG. Since the development of shale gas, the benchmark Henry Hub (HH) natural gas prices in the United States have decoupled from world natural gas prices.
As shown in the figure above, the price of natural gas traded in the U.S. (denoted by NYMEX) is much lower than the price traded in the U.K. (denoted by NBP), the Europe gas contract price and the Japan spot price. So, the U.S. has an advantage in the LNG export market because of its competitive pricing.
LNG demand, supply and price effect
LNG exports market is slated to go up. Exxon Mobil (XOM), in the 10K of 2013, wrote, “About 65% of the growth in natural gas supplies is expected to be from unconventional sources, which will account for about one-third of global gas supplies by 2040. Growing natural gas demand will also stimulate significant growth in the worldwide liquefied natural gas (LNG) market, which is expected to reach about 15 percent of global gas demand by 2040.” According to the U.S. Energy Information Administration (or EIA) estimates, the United States would transition to a net exporter of 5.8 trillion cubic feet a year of natural gas in 2040 from a net importer of 1.5 trillion cubic feet of natural gas in 2012.
Increases in LNG trade would help bring world natural gas prices closer together. The large differences should diminish over time, so that the difference is only due to liquefaction, re-gasification, and transportation costs and demand. For example, Cheniere’s LNG will use pricing that’s based on Henry Hub benchmark plus liquefaction cost. Liquefaction capacity and pricing arbitrage would still be key drivers of LNG carrier demand, although understanding dynamics of LNG demand will be more important as the LNG trade grows.