LNG exports likely to become much less profitable
Profits from selling liquefied natural gas abroad may be elusive, belying the $60 billion race for export licenses as the price gap between Asia and North America shrinks from record levels.
The difference between U.S. and Asian gas is poised to drop by more than 60 percent by 2020, leaving exporters facing a loss of as much as $6 million per tanker, according to calculations by Bloomberg based on data from Rice University in Houston. The U.S. share of the global LNG market will be in “single digits,” according to Royal Dutch Shell Plc, which has stakes in more than 25 percent of the world's liquefaction capacity.
As many as 16 applications for LNG export projects from Texas to Maryland and Oregon are being considered by the Department of Energy as companies look to follow Cheniere Energy Inc. in exploiting record price differentials between the U.S. and Japan, the world's largest consumer. Buyers from Tokyo to London are seeking supplies in the U.S., where prices are less than a third of those in Europe and a fifth of Asian costs.
“The idea that the world will be flooded with spot LNG is not going to happen,” said Frank Harris, global head of LNG at Wood Mackenzie Ltd. in Edinburgh. “Returns are already getting squeezed. By the end of the decade, the LNG market looks better supplied, and spot cargoes from the U.S. won't necessarily look so attractive.”
U.S. natural gas has risen 75 percent from a decade-low in April to $3.327 per million British thermal units Friday on the New York Mercantile Exchange. U.S. exports to Asia would help damp the Platts Japan-Korea Marker, a daily price assessment of Asia-bound LNG known as JKM, to a mean of $8.08 through 2020, from $17.80 yesterday, Rice University's James A. Baker III Institute for Public Policy said in a study.
The average cost of shipping natural gas to Japan will be $9.05 from 2011 to 2020, assuming a U.S. price of $3.98, leaving a loss of $0.96 per million Btu taking into account the costs of transportation and liquefaction, the study shows. Losses widen to $1.77 per million Btu in the decade to 2030 as the price at Louisiana's Henry Hub, the U.S. benchmark, rises to an average $4.69 and the JKM falls to $7.98, according to the study, published Aug. 10.
The loss to the U.K. is $0.49 through 2020 and $1.23 from 2021 to 2030. U.K. next-month gas, the European benchmark, rose 0.4 percent today to the equivalent of $10.88 on London's ICE Futures Europe exchange.
“Applications for export licenses are around 29 billion cubic feet a day,” Kenneth B. Medlock III, the study's author, said from Houston. That's equivalent to about 48 percent of domestic consumption in October, according to the Energy Department. “I doubt we'll see more than 6 billion,” he said.
The economic rationale for delivering LNG to Asia would be significantly diminished at a U.S. price of about $6 per million Btu, while in Europe it disappears at about $5, according to James, Henderson, a research fellow at the Oxford Institute for Energy Studies.
Interest in U.S. LNG exports blossomed in recent years as growing supplies of gas from previously inaccessible shale rocks and the fourth-warmest winter on record cut Henry Hub prices to a 10-year low of $1.902 per million Btu on April 19 from as high as $13.69 in 2008.
The average Japanese LNG price was $16.92 in 2012 to October, peaking at $18.07 in July, according to data from the nation's Finance Ministry. Prices soared from a mean of $9.04 in 2009 as utilities were forced to switch to natural gas in the wake of the March 2011 Fukushima nuclear disaster that led to the temporary closure of all the nation's reactors.
“The arbitrage opportunity that is driving actors to seek export permits and licenses for new liquefaction facilities is based on current price differentials,” said Iain Grant, a manager of special projects at Athabasca University in Canada who has written about the political economy of natural gas trading.
“But should we expect either the low Henry Hub prices or the high Japanese prices to last long enough to justify the massive effort that is underway to capitalize on it?”
Cheniere, based in Houston, is investing about $5 billion in its 18 million metric ton facility at Sabine Pass in Louisiana, which in April became the first facility in almost half a century to receive approval to export to countries that the U.S. doesn't have a free trade agreement with. Shipments are scheduled to start in late 2015 with 11 percent of capacity available to the spot market and the rest tied up in long-term contracts with Korea Gas Corp., GAIL India Ltd. and BG Group Plc.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Small retailers at intersection of social networks, foot traffic
- Woman on dating site looks too good to be true: How to vet that pic
- 153-year-old Venango well pumps out oil, history
- Mark Phelan: Cadillac, Mercedes hope to win at name game
- Test-tube tuna may be sea change
- In ‘StockCity,’ real investing like game
- Business Council for Peace program works to export profits, peace
- Iron ore price decline hurts U.S. Steel’s cost advantage over rivals
- Health care, gas drilling industries await Gov.-elect Wolf’s footprint
- Variable-rate electricity contracts in Pennsylvania can cost customers plenty
- Know flat-rate repair times