With its first liquefied natural gas (LNG) export terminal set to go into production in December 2015, the United States is joining the competitive race for control over global natural gas markets.
Ever since hydraulic fracturing breathed new life into the U.S.’s faltering oil and gas industry, natural gas has become an abundant and cheap commodity for U.S. consumers. With the ability to export, U.S. producers will gain new momentum in terms of better integration with the global LNG market, while the U.S. government will acquire a new lever with which to pursue American global interests.
Unlike crude oil, where a 40-year administrative ban still prevents exports on a large scale, the key obstacle for natural gas exports is the still non-existent LNG export terminals network.
At the moment, five LNG export terminals are being built along the U.S. East Coast, with Cheniere Energy’s Sabine Pass set to become the first operational LNG export facility in the U.S. in December 2015. The project will mark a new chapter for the U.S. energy sector, but prospects for natural gas exports are not entirely rosy.
When times were good and oil prices high, U.S. natural gas producers could count on low domestic prices linked to Henry Hub Spot in order to boost their margins and competitiveness on global markets where gas is indexed to oil prices.
Since August 2014, however, oil prices have slumped by more than 60%. In such an environment, U.S. natural gas lost much of its attractiveness outside the United States. With this in mind, a recently published Brookings Institute study forecasts that only projects currently under construction will make it to the market by 2020, with others more likely to fail.
The industry’s trade group, America’s Natural Gas Alliance, has already warned that the U.S. might lose the battle with other producers for its share of global natural gas markets.
Both Australia and East African countries are ahead, with plans to build export terminals, along with the existing LNG and pipeline exporters, such as Qatar, Russia, Norway, and potentially Iran.
In terms of exports to Europe, the question is how competitive U.S. gas can be in comparison to pipeline-delivered natural gas from Russia and other LNG exporters.
At the moment, the breakeven price of U.S. exports to Europe would be around $7-8 per million British thermal units (mmBtu), compared to an average EU import price of $6.95 per mmBtu in August 2015. Exports to Asia would be higher due to transportation costs, which would make them unviable with current Asian spot prices down by 60%, and currently at $8 per mmBtu.
Apart from market driven circumstances, geopolitical uncertainties in Europe and the Middle East might play in the United States’ favour.
Although U.S. shale gas will probably never be able to compete directly with Russian gas in terms of price, it might have indirect influence on European gas prices by putting an upper cap on Gazprom’s prices: direct impact on the continent’s security in the context of Europe’s skirmishes with Moscow over Ukraine, and efforts to reduce dependency on Russian energy. This is predominantly valid for Baltic and Eastern European countries that are particularly eager to break Russian energy domination.
Turkey, on the other hand, might directly benefit from U.S. exports. At the moment, Turkey imports natural gas at $12 per mmBtu and $14 per mmBtu from Russia and Iran, respectively. In addition, recent upheavals in relations with Russia over its role in Syria could be another reason for Turkey to consider this option after long-term gas import contracts expire in 2021.
In today’s saturated, low-price environment, the U.S. has a long way to go before it establishes a foothold in the global LNG market. In the short term, its impact will be less significant than some would have hoped, but in the long term, it could impact global natural gas prices, ease Russian energy domination in Europe, and strengthen energy security in Asia-Pacific.
