Falling oil prices dilute appeal of US LNG exports to Asia

By ANN KOH and CHRISTINE BUURMA
Bloomberg

Oil’s collapse is eroding the appeal of potential US LNG exports to Asia as it cuts the cost of competing supplies linked to the price of crude.

Brent’s 22% drop this year outpaced the 8.9% decline in natural gas at Henry Hub, the benchmark for US liquefied natural gas (LNG) shipments that are scheduled to begin in 2015. When the cost of processing and shipping American supplies to Asia is taken into account, the price advantage over oil-linked cargoes from producers such as Qatar has more than halved, according to data compiled by Bloomberg.

While the US shale boom prompts the world’s biggest natural gas producer to plan exports of the fuel, it’s also boosting the country’s crude output to the most in 30 years, helping drive down global oil prices.

“The US will not sell cheap gas,” Umar Jehangir, the deputy secretary of development and joint ventures at Pakistan’s Petroleum and Natural Resources Ministry, said in Singapore on Oct. 29, adding that the opinion was his own. “US LNG will be exactly the same price as gas coming out of Qatar to Asia.”

Cheniere Energy, which is set to become the first natural gas exporter from the US shale boom when its Sabine Pass terminal in Cameron Parish, Louisiana, starts next year, says the economics still make sense.

Even after crude’s slump, there’s a 15% gap between Henry Hub-indexed prices and oil-linked supplies, Jean Abiteboul, the president of Cheniere Supply & Marketing, said in London on Oct. 29.

Price Difference

Assuming Henry Hub prices of $4/MMBtu and Brent crude at $100/bbl, US LNG delivered to Asia would be $3.90/MMBtu cheaper than oil-linked supplies after a $3.50 liquefaction fee and $3 shipping is added, Cheniere said in a May presentation on its website.

With Brent at $87.12/bbl as of Oct. 29 and US natural gas at $3.728/MMBtu, the gap shrinks to $2.28, all else being equal. If Commerzbank’s forecast for $85 Brent and $5/MMBtu natural gas next year are accurate, the difference will be about 50 cents. It was $5.26 at the end of last year.

“At $80 a barrel, US LNG is competitive,” Laszlo Varro, the head of gas, coal and power at the International Energy Agency, said in an Oct. 28 interview in Singapore. “At $70 to $75, oil-linked and Henry Hub are roughly the same.”

Sempra Energy

Advances in drilling techniques including hydraulic fracturing have pushed US natural gas output to a record every year since 2011 and made the country the world’s largest producer.

Dominion Resources’ Cove Point terminal in Maryland last month became the fourth US export project to win permission from the Federal Energy Regulatory Commission to ship LNG around the world.

Sempra Energy got FERC approval for its Cameron export terminal in Louisiana in June. Full commercial operations are planned in 2019.

“While natural gas and oil-index prices are subject to future market price changes, we believe North American natural gas will continue to be an attractive choice to meet global demand based upon the availability of supply, access and delivery options, competitive market pricing (e.g. Henry Hub) and government stability,” San Diego-based Sempra said in an e-mailed statement.

Lisa Singleton, a spokeswoman for Freeport LNG Development, which is planning a $14 billion export terminal in Texas, declined to comment. Diane Haggard, a spokeswoman for Houston-based Cheniere, couldn’t immediately make an executive available to comment. Nobody replied to an e-mail and call to the press office of Dominion.

Asian Buyers

West Texas Intermediate for December delivery decreased 18 cents, or 0.2%, to $80.94/bbl at 1:48 p.m. Singapore time. Brent lost 31 cents to $85.93.

Asia is the prime market for US supplies, with the region forecast to consume 75% of the world’s LNG over the next five years, according to IEA estimates.

The US export facilities are selling gas under long-term contracts, typically of about 20 years, which will give both buyers and sellers some protection against some price fluctuations.

Tokyo Gas Co., Japan’s biggest city-gas distributor, agreed in July to buy about 520,000 tpy from the Cameron project for 20 years starting 2020. GAIL India will take 3.5 million tpy for two decades from Sabine Pass and has also booked capacity at Cove Point.

All else being equal, crude would have to fall below $70/bbl to make long-term oil-linked contracts competitive against North American LNG, Kazuo Yoshino, chief financial officer at Tokyo Gas, said at a press conference. Even if they are cheaper, the company will still buy US shipments because it wants to diversify its supply sources, he said.

Brent crude for settlement in December 2019 is currently priced at $91.67/bbl, according to Bloomberg fair value data. Henry Hub gas is at $4.526/MMBtu.

“US LNG is a reality,” said Hiroki Sato, general manager of fuels at Chubu Electric Power Co., Japan’s second-biggest buyer of LNG.

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