Global LNG markets move faster than government policies, experts say

Published in Oil & Gas Journal

Global LNG markets move so quickly that government policies worldwide won’t likely keep up with them, experts agreed. This makes it nearly impossible to predict the extent to which US LNG exports would find customers, they said at the Bipartisan Policy Council’s July 25 conference on US shale gas’s economic and geopolitical potential and in subsequent phone interviews with OGJ.

The US export potential has already backed out some sales to Asian markets “before we’ve exported a drop,” Melanie Kenderline, counselor to US Sec. of Energy Ernest J. Moniz, said in her keynote address to the BPC conference. “There certainly has been a robust interagency discussion of LNG exports as part of a broader economic strategy, and that discussion is continuing.”

Several of the conference’s speakers and other experts OGJ interviewed Aug. 13-19 said global gas suppliers by pipeline as well as LNG tanker already are trying to adjust to rapidly changing global markets by offering more favorable terms.

“I think Americans aren’t aware that the rest of the world is capable of building LNG export facilities, and they’re going ahead and doing it,” Margo Thorning, senior vice-president and chief economist at the American Council for Capital Formation, said on Aug. 13.

“There are 63 projects outside the US, some of which are already operating, in places like Iran and Russia,” Thorning told OGJ. “If we aren’t allowed to sign contracts because applicants don’t have export licenses, we could lose this opportunity.”

The US Department of Energy routinely approves applications to export LNG to countries with which the US has a free trade agreement, and has granted a few requests to allow exports to those which don’t because they serve the national interest. There are no guarantees every export project would be built if all were approved immediately, several experts outside DOE have said.

‘The best chance’

Dale Nijoka, global oil and gas leader at Ernst & Young, told OGJ he favors more US LNG exports, but added, “I also am a realist. If they were to approve the next five of them tomorrow, it probably wouldn’t change much in the next 5 years because of financing and construction times. We already have 6 bcfd approved, and government reports estimate it could reach 8-12 bcfd. We’re certain not every one of the proposed projects will be done because the economics won’t justify it. The next few stand the best chance.”

David Montgomery, a senior vice-president at NERA Economic Consulting, said at the conference, “The world market limits how much US gas would be exported. There are producers who are better situated and have no other use for their gas who would compete with us. In this case, all we need to do is get out of the way and let the market make that determination.”

A major consideration is who will bear the commodity and market risk, observed Scott Moore, vice-president of marketing at Anadarko Petroleum Corp. “My sense is we’re moving to a commercial market where questions involve which project is financially and commercially viable,” he said.

The panel’s third member, Gary Hufbauer, Reginald Jones senior fellow at the Peterson Institute for International Economics, said other gas suppliers are responding. “Anyone who has observed Russia since the Cold War ended knows its political climate can change quickly,” he said. “It conceivably could become more reliable if it begins to lose a significant share of its market.”

E&Y’s Nijoka told OGJ: “I really believe Gazprom is pushing hard to keep its market share, but it clearly doesn’t advertise what it’s doing. I also think the contracts provide a provision for customers to sign on long-term in exchange for better terms. At the end of the day, it still takes its marching orders from the Russian government.”

More fungibility

Kenneth B. Medlock, an energy studies fellow at Rice University’s James A. Baker III Institute for Public Policy who was part of a second panel at the conference, said, “I caution people who believe political considerations drive decisions in Russia. Commercial concerns matter too. Before the cutoff to Ukraine in 2005-06, there were 40 years of reliability. What has changed is fungibility, with shale supplies able to compete.”

A second panelist, Robert Johnston, global energy and natural resources director at the Eurasia Group, said the US is limited in the extent to which it can use LNG exports as a foreign policy tool because gas globally has moved from scarcity to abundance. “Europe has a great opportunity to diversify its supplies from Qatar, which is a reliable supplier,” he said, adding the US is likelier to export gas by pipeline to Mexico and as LNG to Caribbean nations.

“In recent negotiations with China, Qatar seemed willing to go as low as necessary,” said the panel’s third member, Francis O’Sullivan, executive director of the Energy Sustainability Challenge within MIT’s Energy Initiative.

“Qatar has been active,” noted Susan L. Saknar, the Andrews Kirth Energy Law Scholar at the University of Houston Law Center. “I don’t know offhand how much extra capacity it has. It has had a moratorium on new LNG projects for years while it has diverted gas for domestic use and gas-to-liquids. I don’t know how much it has to offer, but it could adjust its pricing. Right now, Japan could get all of its gas from Qatar. Certainly, it would be the biggest competitor.”

Saknar told OGJ on Aug. 19, “Price and timing are always the big issues. I think a lot of players are looking at the US as another reliable supplier. I think more gas will leave the US than many people think or would like to believe because of this. Purchasers don’t always have to pay the gas, but would pay a capacity fee. I think a lot of off-takers would sign up just to have another reliable supplier.”

Additional variables

More US LNG exports potentially could have a wide range of other consequences, market observers say. Sales to Caribbean nations that now use diesel fuel to generate electricity could erode an important part of Venezuela’s crude oil and product exports. Mexico imports 2-3 bcfd by pipeline from the US already but still has to supplement it with LNG purchases at $17-18/MMbtu—the premium prices Japan and South Korea pay—which could stimulate construction of a more domestic gas pipeline network for less expensive gas from the US.

Johnston said Canada’s National Energy Board, like DOE in the US, is primarily an enabler working with Alberta, British Columbia, and other producing provinces to expand LNG exports as part of a broader economic growth strategy. It’s trying to approve export projects expeditiously to send a positive signal to global markets, but “commercial agreements are needed,” he said, adding, “Otherwise, Canada runs the risk of falling behind the US.”

Sluggish national economies also could limit development of other potential gas resources worldwide. “Eastern Mediterranean gas is on the back burner principally because its biggest customer is Europe, which is pretty much a basket case,” said Medlock. “Greece, Italy, and Spain have the biggest demand growth, and you all know the problems they’re having.”

That could give countries that are major producers already time to rebuild their internal operations while pursuing major new customers. “If Iran and Venezuela changed how they handle their markets, it would have a major impact because their resource bases are so great,” Medlock observed. “Iran, for example, would become India’s logical LNG supplier if it could resolve its trade embargo problems.”

US gas producers also have an eye on China, India, and other countries that have blossomed economically but don’t have free trade agreements with the US that would expedite LNG exports. Thorning thinks the distinction is artificial, “a political distinction that’s not very valuable.” He said, “In this case, it’s holding up all the investment in the US—literally billions of dollars—that we could be making. Every billion dollars invested represents 23,200 jobs, according to the [US Department of Commerce’s] Bureau of Economic Analysis. It would be a huge economic boost to our lagging job growth.”

Saknar concluded, “The challenge for US policymakers is that we have a distinction that no longer makes sense. The law was written 20 years ago when it was inconceivable we’d ever be an LNG exporter. The law was written about the time we entered into the North American Free Trade Agreement and the US wanted to be able to import gas from Canada and Mexico. I think Congress needs to step in. DOE is working with a law that doesn’t make sense, but it’s doing the best it can and doing a pretty good job. Over time, the law might be eroded and gradually ignored.”