December 7, 2012 / 4:41 PM / 7 years ago

Analysis: Prices, not policy, will shape U.S. gas exports

NEW YORK (Reuters) - The economic boon of opening up U.S. natural gas production for export as described in a high-profile report this week has not drastically shifted expectations about how much fuel will eventually find its way to foreign shores.

With more than a dozen projects proposed to liquefy and export a bounty of cheap U.S. natural gas, industry experts say big obstacles remain to make them all economical, despite the clear message from the government-funded study: the more gas shipped overseas, the better for the domestic economy.

The long-awaited report, commissioned by the Department of Energy and conducted by NERA Economic Consulting, lifted some uncertainty about the overall fiscal impact of gas exports.

However, the huge cost of building intricately designed plants that cool natural gas to a liquid for shipping, the volatility of U.S. gas prices and the uncertainty about global demand remain key hurdles for potential exporters, regardless of the political landscape.

“It was a positive report, but it doesn’t radically change my view on exports,” said Katherine Spector, head of commodities strategy at CIBC World Markets. “A lot of it will come down to economics.”

The debate about exporting gas abroad has raged since new drilling technologies revolutionized U.S. gas production, pitting gas producers who would capture higher prices abroad against consumers who would benefit from lower fuel costs at home. Output has risen to record highs due to the development of vast shale deposits. Prices, meanwhile, fell to 10-year lows in April.

With excess gas at home, and prices far below global levels, companies are scrambling to export U.S. gas to high-paying markets in Europe and Asia. Fifteen projects are in the early stages of approval to export, according to government records.

One project - Cheniere Energy’s Sabine Pass plant in Louisiana - has the full regulatory go ahead and has already signed deals to supply companies in India, Great Britain and South Korea.

Oil majors have followed suit, with Exxon Mobil (XOM.N) seeking export approval from its Golden Pass import terminal in Texas and Royal Dutch Shell (RDSa.L) also considering its options.

But the government stalled the approval of further projects this year until it had received the report on the affect exports would have on the U.S. economy.

That report on Wednesday concluded that exports would overall be beneficial, despite leaving consumers to pay more for gas at home. It got a tepid reception from U.S. manufacturers that benefit from lower cost gas and would see profits take a hit if lower domestic supplies drive up prices.

Despite the report’s overall positive outlook for exports, it did not change the bigger picture for U.S. exports for market experts.

“The prospects for projects going ahead are less about the regulatory approval process and more about the market and the ability of global importers to absorb additional supply,” said Gordon Pickering, a director with Navigant Energy.

The industry has been stung by swings in the gas market in the past. A decade ago, companies were scrambling to build terminals to import natural gas into the United States as domestic production fell.

Since the shale gas boom, those projects — which cost billions of dollars — are mostly gathering dust.


Gas exports in the form of liquefied natural gas (LNG) is reliant firstly on U.S. gas prices remaining far below global prices for some time, which lends added risk to billion-dollar LNG projects.

Currently, with U.S. gas prices below $4 per million British thermal units (mmBtu) and Asian spot prices at $15, it is profitable to sell gas there, even after the cost of liquefying the gas and shipping it across the ocean. But U.S. gas prices are known for their historic volatility, keeping some Asian buyers wary.

“The support for the U.S. is very conditional. People are very excited by this, but it will be interesting to see what they think if prices hit $5.50,” said Nikos Tsafos, analyst at PFC Energy in Washington. PFC expects to see two or three U.S. LNG projects up and running by 2020.

U.S. prices have doubled since hitting April’s low around $1.90 per mmBtu. On Thursday, gas futures traded in New York settled at $3.67.

Moreover, U.S. LNG producers will be fighting for a share of a competitive global LNG market dominated by a few large producers, and the appetite for new supply will influence how many U.S. projects are eventually built.

“Qatar, Russia and Australia have a leadership position in those markets and are going to fight very hard to retain what they have,” Navigant’s Pickering said. “They are at least five years ahead of these U.S. LNG projects.”

Reporting By Edward McAllister; editing by Jim Marshall

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