US exports of LNG to transform global gas market — Deloitte
By Adrienne Blume and Stephany Romanow
Process Editor and Editor, Hydrocarbon Processing
HOUSTON -- Deloitte executives and advisors held a press briefing Tuesday for the release of a new report on liquefied natural gas (LNG) exports from the US. The report, Exporting the American Renaissance: Global impacts of LNG exports from the United States, presents possible scenarios on the impact of US LNG exports on the global gas market and pricing.
Impact scenarios for US LNG exports. According to the report, there will be "winners" and "losers" in the global natural gas market. Deloitte conducted a two-case evaluation using its World Gas Model, in which the US would export 6 billion cubic feet per day (Bcfd) of LNG from 2016 (see Fig. 1). The majority of these exports would be fueled by US shale gas production, which has grown rapidly over the last several years.
One scenario examines the changes that could arise from exports to Europe (3 Bcfd each to the UK and Spain), and another scenario looks at the potential market movements associated with exports to Asia (2 Bcfd each to Japan, South Korea and India).
The report presents a number of findings:
-- US LNG exports could facilitate the transition away from oil-priced indexation of gas supply contracts
-- Prices are forecast to decrease significantly in regions and countries that import LNG from the US; however, prices will only marginally increase in the US
-- US LNG exports would narrow price differentials between US and export markets; thus, the volume of economically viable LNG exports would be limited by the market
-- US LNG exports would provide economic benefits for gas-importing countries
-- Gas-exporting countries would suffer a decline in trade revenues
-- US LNG exports could displace a portion of oil consumption through increased gas-fired power generation.
An expensive entry-level business. Presently, LNG comprises 9% (around 40 Bcfd) of the global gas market. Over the next 20 years, LNG exports are estimated to increase by 20 Bcfd to 60 Bcfd; likewise, the global gas market will nearly double over the same period. Those nations with excess natural gas reserves, such as the US, Australia and Russia, will have revenue-generating opportunities.
There will be many changes in the global gas market, even in a scenario where LNG exports from the US do not materialize (see Fig. 2). Global LNG production is forecast to double over the next 20 years, regardless of the US' involvement in the LNG market. As global LNG supplies grow, the countries with the highest demand will set prices for the market. According to the report, the landed price of LNG in Japan for much of 2012 was around $15/MMBtu, or five times higher than Henry Hub gas prices in the US.
US LNG exports could also offset some trade revenues and gas export volumes from gas-exporting countries. However, even with exports of 6 Bcfd, the US will only displace around 1 Bcfd of Australia's LNG exports. The Pacific country, which is set to overtake Qatar as the world's largest LNG exporter over the near term, could be producing as much as 25 Bcfd of gas by 2030, according to Deloitte. Qatar presently produces around 10 Bcfd of LNG.
US LNG exports and gas pricing. According to Deloitte MarketPoint Natural Gas Market Leader Tom Choi, the impact on US gas prices from domestic LNG exports will be minimal, with a projected maximum increase of $0.15/million Btu (MMBtu), since the US has a large resource base. However, prices in LNG-importing regions with smaller resource bases, such as Western Europe and Asia, will decrease significantly. The margin between the US and other markets will shrink over time as gas prices increase and become more competitive.
The report also discusses possible evolution in pricing mechanisms. Some exporters will continue to price gas supplies based on the oil price index. High crude oil prices support high LNG prices. However, this could cause exporters to lose market share as new supplies come online and as gas price competition increases.
Oil-based pricing contracts will come under pressure as producers seek to maintain oil price indexation and importers seek competitively priced supplies. US LNG is inexpensive, which may eventually help to erode oil price indexation. Mr. Choi asserted that the market is generally transitioning toward a more competitive price regime, especially since US LNG sold to buyers in the Asia-Pacific region is not indexed to oil prices. New US LNG supplies are widely expected to be indexed to Henry Hub gas prices rather than to crude oil benchmarks.
Positive outlook for US LNG. Deloitte forecasts a positive overall outlook for the impacts of US LNG exports on the global gas market and pricing. These exports will strengthen trading relationships between the US and LNG-importing nations with which the country has positive relationships, especially in the OECD.
Deloitte has been invited to present its reportthe third in a series of studies on the impacts of US LNG exportsto the US Energy Information Administration (EIA). For more information, please visit www.deloitte.com.