The Correlation Between LNG Exports and Natural Gas Prices

Natural gas producers are searching for options to increase their revenues as gas prices in the United States have sunk to levels not seen in more than 10 years. As this year’s mild winter continues, gas storage is brimming with inventories that are 42% higher than a year ago and 38% above average. Although producers continue to trim output, spot market prices in the U.S. remain well below levels that producers enjoyed for the past decade.

In the near term, domestic demand will not grow quickly enough to absorb the excess supply and drive up prices, thus some producers are now looking to new overseas markets where the gas commodity carries a greater value. This action will likely raise natural gas, electricity, and coal prices in the U.S.

LNG Exports to Markets of Greater Value
While natural gas prices languish below $3/MMBtu in the U.S., prices in Asia are in the range of $16/MMBtu, and European prices are well over $10/MMBtu. By liquefying their gas and transporting it via tanker ships to Asia and Europe, U.S. producers could compete in these more robust markets. The U.S. currently imports Liquefied Natural Gas (LNG), however imports have dropped significantly as domestic production of shale gas has increased. Still, significant infrastructure exists in the U.S. to produce, process, and transport natural gas to LNG regasification facilities.  Instead of using these facilities to import gas, the U.S. could convert them gas liquefaction and export facilities. As of August 2011, the Department of Energy, Office of Fossil Energy (DOE/FE) had received four applications for permission to export approximately 5.6 billion cubic feet per day (Bcf/d) of LNG.  This represents approximately 8% of the expected U.S. natural gas demand in 2015.

EIA Studies the Issue
In a recent study [1], the U.S. Energy Information Administration (EIA) looked at four scenarios for LNG exports based on the total amount that would be exported and how quickly the exports would increase. It also took into consideration the rate of growth of the U.S. gross domestic product and the production rates of U.S. shale gas wells. The scenarios are as follows:

  • 6 Bcf/d phased in at a rate of 1 Bcf/d per year (low/slow scenario)
  • 6 Bcf/d phased in at a rate of 3 Bcf/d per year (low/rapid scenario)
  • 12 Bcf/d phased in at a rate of 1 Bcf/d per year (high/slow scenario)
  • 12 Bcf/d phased in at a rate of 3 Bcf/d per year (high/rapid scenario)

Source: p. 2 of EIA study

Lastly, the EIA evaluated the impact that natural gas exports would have on domestic coal prices, electricity prices, and utility customers. The time frame for the analysis was split into two periods, 2015-2025 and 2025-2035, and also averaged over the 20 years.

Higher Prices, Decreased Usage
Under all four scenarios, natural gas prices increase for all consumers, their consumption of gas decreases due to the higher prices, and gas production increases. The new production is primarily from shale gas projects and from increased Canadian gas imports. The EIA’s study shows a broad range of increased domestic production from 72% under the most bullish assumptions for shale production and a high, rapid export market, to only 7% for a low, slow expansion, and a bearish outlook for shale production.

Under the more pessimistic EIA assumptions, Canadian gas imports play a larger role.  What is unknown, however, is what may occur if environmental studies conclude that shale gas production is harmful to the environment and is therefore completely halted in the U.S. So far France and Bulgaria each have banned hydraulic fracturing due to environmental concerns.

According to the EIA’s estimates, natural gas prices would rise by a few percent to as high as 36% for one year under one scenario:

Forecast Rise in Natural Gas Prices Due to Exports Source: p. 2 of EIA study

The largest decrease in natural gas usage due to higher prices is forecasted to take place in the electric power sector, which has the ability to switch to alternative fuels and alternative forms of generation.  The second largest decrease is projected to occur among industrial customers. The EIA’s study shows that over time industrial customers will stray even further from natural gas as they replace large equipment with non-gas burning alternatives.  Residential and commercial customers will only make modest cuts in their natural gas usage as they have very few alternatives.

As electricity generators shift some of their load to cheaper coal-fired plants, coal production and prices will show modest increases.  Renewable energy projects can be more expensive on average than natural gas and coal projects, thus they will benefit from higher prices for both competing commodities.  Changes to current environmental standards, which make it more difficult to burn fossil fuels, will benefit renewable projects as well.

Who Benefits from U.S. LNG Exports and Who Pays?
The largest beneficiaries of the potential overseas export markets are the U.S. producers who the EIA forecasts will see annual revenue increases between $14 and $32 billion. The tighter the gas supply, the higher the revenues, thus the highest forecasted increases occurred in the high, rapid expansion scenario coupled with the pessimistic shale gas forecast.

The net profit potential of LNG exports is unknown as the EIA did not compile a forecast of the costs necessary to build and implement a liquefaction project. However, what appears to be certain is that the rest of the U.S. market will pay for the exports of domestic gas to foreign countries in the form of higher natural gas, coal, and electricity prices for years to come.

Such forecasted change has raised many key questions: Given the state of the U.S. economy and the nature of global competition, is it the role of the government to restrict exports and protect the domestic market versus grow the natural gas market for U.S. producers? Should the U.S. government restrict natural gas exports in order to keep prices lower for domestic customers? To do so would be a significant change to our current focus on free markets and might impact other commodities such as coal, where 9% of current U.S. production is exported.

Want to learn more about  LNG?  Learn the business of LNG from liquefaction through regasification in Enerdynamics’ 146-page book titled  Understanding Today’s Global LNG Business. Click here for details or to order this book online.

References:
[1] See Impact of Increased Natural Gas Imports on Domestic Energy Markets, January 2012, available at http://www.eia.gov/analysis/requests/fe/pdf/fe_lng.pdf

by Christina Nagy McKenna, Enerdynamics Instructor

Original Article on Enerdynamics





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