United States Moves Toward LNG Exports

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United States Moves Toward LNG Exports

by Tony D’Altorio, Investment U Research
Wednesday, June 8, 2011

Just a few short weeks ago, the natural gas market saw a jump up in prices to 10-month highs. The reason for this sudden jolt higher was the announcement that the United States had authorized its first big export project for liquefied natural gas (LNG).

The U.S. Department of Energy authorized Cheniere Energy (AMEX: LNG) to export LNG from its Sabine Pass terminal. Sabine Pass is the largest of nine LNG import facilities in the United States.

Cheniere Energy plans to retrofit the import terminal for liquefaction capabilities. Construction is set to begin in 2012 and the production is expected to come online in 2015.

The company already has preliminary deals in place to supply LNG to companies globally, including Spanish utility Endesa and Japanese trading company Sumitomo.

An LNG Milestone for the United States

This LNG export project marks a milestone. It’s a big step toward the globalization of natural gas markets and will put the United States into direct competition with other LNG exports including Russia, Qatar and Australia.

Natural gas trading currently occurs in separate markets around the globe. That is, there’s no one unified global price for natural gas. Markets remain isolated due to a lack of infrastructure uniting them.

In the United States, for example, prices are based mainly on daily settlements at Henry Hub, a Louisiana pipeline nexus.

In much of continental Europe and Asia, natural gas is sold at a percentage of oil prices under multi-year contracts. So the recent rise in crude oil prices has been painful for utilities in these regions locked into oil-linked supply deals.

The difference between the markets is striking. Henry Hub gas costs less than $5 per million BTU. Meanwhile, the benchmark for East Asia is more than $13 per million BTU, according to data from Platts.

The Rise of Liquefied Natural Gas Reverberates Globally

The rising flow of LNG globally is slowly beginning to bring together these disparate gas markets.

Exports of liquefied natural gas are already having an effect on gas prices in Europe. An influx of LNG and depressed demand have pushed down spot prices on the continent.

This is giving utilities the muscle to renegotiate long-term natural gas contracts linked to oil prices.

The giant Russian gas supplier, Gazprom OAO (PINK: OGZPY), has now agreed to link some sales to spot prices. But 69 percent of natural gas sold in continental Europe is still linked to oil, according to Societe Generale. So change is occurring at a snail’s pace.

The prospects of increased LNG exports from the United States and elsewhere will be music to the ears of east Asian utilities who are still tied, for the most part, to those oil-linked contracts.

Japan, in particular, could use the relief. This country is the world’s largest LNG importer. And its demand for gas is expected to increase even further following its nuclear disaster.

However, the prospect of natural gas exports to pricier markets in Asia has not been uniformly welcomed in the United States.

A Leveling of Natural Gas Prices?

Both utilities and industrial companies claim the Cheniere project will lead to higher domestic natural gas prices.

The head of trading at energy trading firm Mercuria, Daniel Jaeggi, agrees with that assessment. He said, “The United States is the cheapest gas producer in the world right now. But the difference between long-term prices for U.S. natural gas and LNG to Asia is going to start to narrow from now on.”

Morgan Stanley also agrees. It’s estimated that North American LNG export capacity may exceed six billion cubic feet per day. This is about 10 percent of the current U.S. daily production of 60 billion cubic feet per day of natural gas. It expects the ramp-up of LNG exports to ease the current poor price environment for gas producers in North America. In other words, natural gas prices will go up.

In reality, LNG exports will simply be getting natural gas pricing back to more normal levels.

The ratio of Brent crude oil to Henry Hub gas touched a record of more than 31-to-1 on April 8. The average during the past decade is about 10-to-1. So a higher natural gas in the United States will just be a return to normalcy.

The Long-Term Outlook for LNG

Exports of LNG from the United States will help not only Cheniere, but also companies involved in U.S. natural gas production such as Chesapeake Energy (NYSE:CHK).

However, the relief may not last for long…

As natural gas prices rise in the United States, exports will become less competitive. That’s because the United States is at a competitive disadvantage when it comes to LNG logistics.

It simply costs more to transport LNG on ships from the United States to Asia than from Australia… or from Russia to Europe via pipelines.

So for investors in Cheniere and other stocks looking to benefit from a projected LNG export boom, remember – don’t stay at the party too long.

Good investing,

Tony D’Altorio

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