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Page added on August 17, 2012
While discussion of exporting liquefied natural gas has focused on the effect on domestic prices, a new study finds that international prices will be the limiting factor.
In fact, not much U.S. gas is likely to find a market overseas through at least 2040, according to “U.S. LNG Exports: Truth and Consequence,” published Aug. 10 by the James Baker Institute for Public Policy at Rice University in Houston, Texas.
Baker Institute economist and report author Kenneth B. Madlock cites several reasons.
First, the current price differential — around $3 per million British thermal units in the U.S., with imports to Japan at around $17 — is transitory, Madlock wrote.
Prices are so low in the U.S. now because a mild winter coincided with a surge in production. And they’re so high in Japan only while suppliers adjust to that country’s sudden shift from nuclear power to natural gas following the March 2011 tsunami that knocked out the Fukushima nuclear plant.
In addition, the amount of export capacity proposed in the U.S. would have a significant effect on global prices.
“LNG trade in 2011 totaled 32 (billion cubic feet per day, or bcfd),” Madlock wrote.
“Currently, in the U.S. alone there is over 17 bcfd of export capacity in various stages of proposal and development,” he continued. “If even one-third of this capacity is built and placed into operation, it will dramatically alter the ability to supply the Asian market with natural gas.”
Indeed, even without being exported, U.S. shale gas has been reducing prices in Europe and Asia by displacing gas that could have been imported here.
“LNG supplies whose development was anchored to the belief that the United States would be a premium market have been diverted to European and Asian buyers,” Madlock wrote.
That downward price pressure is changing the pricing paradigm, he wrote — from the long-time practice of indexing contracts to the price of oil to indexing them instead to the lower spot price.
Finally, Madlock sees plenty of conventional and unconventional gas supplies available for development globally.
“The apparent profitable export option from the U.S. market based on current market conditions is transitory, as current market conditions beget a supply response abroad that erodes current price differentials,” he concludes.
With or without exports, Madlock sees a long-run equilibrium price of U.S. natural gas at between $4 and $6 per thousand cubic feet “for many years to come.”
“U.S. LNG Exports: Truth and Consequence” may be downloaded from the Baker Institute’s website.