No direct advantage to Europe from U.S. LNG exports – white paper argues

LNG tanker ship
Source: DollarPhotoClub

Europe would not have a huge direct advantage because of U.S. LNG exports but would reap indirect benefits due to increased total supply of natural gas – according to a white paper released yesterday by the Energy Mining Advisory Partnership (EMAP). The document – titled “Impact of U.S. LNG Exports on Europe” – analyses the potential impact of U.S. LNG exports on European Union and Turkish economies in the short, medium and long term under different scenarios.

Three technological advancements led to U.S. shale gas boom in last ten years:

  1. hydraulic fracking made extraction from low permeability shale formations economically viable,
  2. horizontal drilling increased the amount of shale that could be “fracked” from a single well and
  3. improvement in seismic imaging reduced the number of drilling attempts by providing more accurate information.

This resulted in 50 per cent increase in reserves and 34 per cent increase in natural gas production in the U.S. over the last decade. The increased production reduced the price of natural gas in the U.S. to one-third of European levels and one-quarter of Japanese levels. This created a compelling commercial logic for exporting natural gas from the U.S.

As a result, the Department of Energy (DoE) in U.S. received 43 applications for permission to export liquefied natural gas (LNG) from a total of 34 proposed terminal projects till July, 2014.

With Cheniere Energy’s Sabine Pass LNG facility scheduled to start production in Q4 2015, the white paper examines the potential impact of U.S. LNG exports on European natural gas prices and energy security. The paper analysed:

  • Current supply and demand dynamics of European Union, Asian and Turkish natural gas market and the outlook for short to medium term.
  • The trend of continuously increasing share of spot or short-term trade as a proportion of total LNG trade.
  • The pricing and costs of LNG to be exported from various terminals in the U.S.
  • The current spot rates of natural gas in the U.S., Europe and Asia and the change expected over long and short term.
  • The potential impact of the new supply of LNG on European Union and Turkey under various scenarios.

The authors of the report argue that U.S. exports are likely to be marginally competitive for terminals in Spain and UK and not commercially viable for other European terminals at current prices. For that reason U.S. LNG exports would not be commercially viable for most of the European market. They would, however, have an indirect impact on European energy costs and security. For one, U.S. exports would place an upper cap on the prices that Gazprom can push for in future price negotiations with Europe.

In situations where political considerations trump considerations of price – for example in some Eastern European countries – there might be some interest in buying from alternative sources if the price is comparable to the Russian supply.

The trade with Asia can be commercially viable for US LNG companies if by 2018 the oil prices recover to above US$75. The prices in Japanese spot market would go up to US$11/mmbtu at that price-level, as per Credit Suisse estimates.

If prices are commercially viable in Asia, and U.S. is able to capture some of the market when long-term contracts in the region expire, gas prices in Europe would come under pressure. This would also increase Russia’s dependence on the European gas market.

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