In April 2012, Cheniere Energy received final regulatory approvals to build a major liquefied natural gas (LNG) export terminal at Sabine Pass in Louisiana. This event rippled through the energy world, with concern growing that export natural gas would lead to higher domestic prices. Currently, natural gas prices in Asia are 3-4 times higher than those in the U.S. while prices in Europe are 2-3 times higher. In light of these spreads, industrial gas producers are urging the Department of Energy to approve LNG exports. However, the export of LNG is unlikely to have significant impact on natural gas prices in the next 3-5 years. Rather, other factors, such as new environmental regulations, are likely to be more significant drivers of natural gas prices.
The following chart shows the price of natural gas futures for calendar years 2015-2018 since February 25, 2012 (source: NYMEX):
Interestingly enough, Cheniere’s announcement that it had received approval for an LNG export terminal in mid-April 2012 actually led to a dip in natural gas prices, suggesting that LNG exports, especially on the level contemplated at Sabine Pass of 2.2 BCF/day, are not going to have a significant impact on natural gas prices. Part of the reason for this is that production is well outstripping the near term impact from the export of LNG. In January 2011, natural gas production was 66.5 BCF/day in the lower 48 states, but as of November 2012, the latest month for which information is available, production increased over 10% to almost 74 BCF/day. This suggests that even with some export of LNG, there will be sufficient natural gas available that LNG exports will not be a key driver of future natural gas prices.
At a U.S. Senate hearing on February 13, 2013, concerns were raised that LNG exports could substantially increase domestic natural gas prices. The new Chair of the Senate Energy Committee, Oregon Democrat Ron Wyden has been skeptical about LNG export projects and is fearful of higher costs that will affect major consumers. The debate is heating up, and the following items will continue to be evaluated:
LNG exports economic benefits
Job creation
Opportunity to build Infrastructure
Revive NG dry production
Was natural gas demand underestimated in the Department of Energy Report?
Is there an LNG export volume sweet spot?
Will infrastructure costs reduce arbitrage opportunities?
How will other producing nations react to project approvals?
Will US manufactures be affected due to higher feedstock costs?
LNG unlikely to have a major impact on gas prices
Natural gas prices, at least in the next 3-5 years are likely to be driven by factors other than the export of LNG. There are over 20 applications for LNG Export terminals pending before the DOE as of January 31, 2013. In total, these would represent almost 24 BCF/day of export capacity if all were approved. Nevertheless, there is the belief that natural gas exports could peak at 8Bcf/day. Additional LNG export projects are expected to have a small and gradual effect on natural gas prices during the next decade. Approving applications does not mean all projects will be built.
One of the main drivers of natural gas prices in the U.S. over the next few years will be the move to natural gas fired electricity generation in response to recent EPA regulations that will force the retirement of older coal plants. In order to replace this capacity, electricity generators will look to natural gas plants, which are cheaper to build and have significantly lower emissions. As these plants come on-line, natural gas consumption will increase in the power sector and impact natural gas prices more than LNG exports in the next 3-5 years.
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ALBERTO RIOS, DIRECTOR ENERGY RISK MANAGEMENT
arios@acclaimenergy.com (832) 294-2506
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