Long ago, an executive promoting U.S. LNG exports told me that Japan should buy U.S. LNG because the trade deficit had become a politically sensitive issue. I tried to explain that “Japan” didn’t buy LNG, rather, Japanese companies did and they were not particularly inclined to make business deals with regard to the nation’s trade balance. The same could now be said of Trump’s announcement that Europe will be addressing its trade imbalance by purchasing more U.S. LNG.
Which is not to say that Europeans won’t be buying more U.S. LNG, rather that the conditions under which that happens are largely unrelated to trade politics. Some countries in Eastern Europe will no doubt buy our supply in order to reduce their dependence on Russian exports, but whether or not the major Western European countries become large-scale buyers will depend on the price of LNG and competing supplies.
More important than politics are the business practices of the U.S. LNG export industry and the price of competing gas in Europe. Historically, the price of most gas traded internationally has been indexed to oil prices based on their Btu (or energy content) equivalence. This seems logical but only in a superficial way, rather as if tea producers priced their product based on coffee prices, equating them by their caffeine content. (Yes, I used that metaphor before but it is still apt.)
In the past, LNG exporters have planned large projects to achieve economies of scale and insisted that they needed contracts which guaranteed purchases for up to twenty years to proceed with development. Selling into the open market, as many oil producers did, was not considered viable because the projects were very expensive but also because there were few buyers with facilities to accept imports; unloading, storage and regasification.
U.S. LNG exporters, notably Cheniere, have taken a different tack, not only selling at prices indexed to U.S. gas prices (at the Henry Hub), but also seeking spot sales where opportunity arises. Although it is more costly, an LNG tanker can offload without a regasification terminal, sitting in port and delivering gas into a local system. Thus, sales have been made to places like Barbados and Pakistan, nations that are not traditional importers but where an arbitrage opportunity existed. The figure below shows U.S. LNG exports by region, and the largest amounts are too traditional importers in Asia (Japan, Korea and Taiwan), but with occasional spot sales to new importers.
Sometimes these prices can be quite high, again reflecting arbitrage opportunities. As the figure below shows, prices to Caribbean countries like Barbados could be quite high, although the volumes were very low; they were probably unattractive to other exporters as a result, and cost more as tankers must linger to act as a regasifier. The bigger customers in Asia paid much lower prices for larger volumes, much of it under long-term contract.
What is most interesting is the relationship of LNG export prices to oil prices, shown in the figure below. In early years, when Alaskan LNG sales to Japan constituted the bulk of exports, LNG prices tracked oil prices. That has become less true as new, merchant exporters like Cheniere have begun operations. Although a few small sales have been at high prices, the majority in recent years have been at prices related to Henry Hub gas prices, remaining low as oil prices rose.
While many European gas distribution is handled by national monopolies, and some have a history of over-paying for imports, that practice is largely in the past, when neo-Malthusian resource scarcity (and a poor understanding of supply) saw British Gas pay well above market price for gas from the Sleipner Norwegian field, for example.
With Russian natural gas pipelines largely representing sunk capital costs, their ability to undercut U.S. exports to Europe is significant, but their willingness is another matter. Especially if they are able to sell to the East Asian market at something close to oil-related prices, and oil remains in the $60 and above range, then Russia might be glad to allow U.S. exporters to gain market share at their expense in Europe. (Which would be economically optimal in some respects, U.S. exports to the Atlantic market being lower cost than to Asia, while pipeline gas from Russia to China should be much more efficient.)
In terms of politics, the global gas trade and the U.S. export industry are a long way from the point where a major pipeline supplier of natural gas (Norway, Russia) doesn’t gain some influence from the still low level of fungibility in the global market. Even so, the system has a large amount of resilience to supply disruptions including conservation, interruptible sales to large users and substitution of petroleum liquids such as propane in many uses. Don’t forget that the most dependent relationship was between Russia and the Ukraine, but only the force of arms achieved Russian goals in that nation.
It remains very true that, as in real estate, natural gas is about location, location, location, but mainly because that helps determine the cost of delivered supply. However, as long as gas prices are determined not by marginal cost but by contracts indexed to oil prices, there is a good market opportunity for American exporters to exploit.
Source: ForbesPrevious Next