Sunday, November 1, 2009

The Russians Are Coming! (and They’re Bringing Gas)

There was a good article in Forbes a couple of weeks ago about the U.S. trading operations for Russian energy giant Gazprom and the company’s desire to bring lots and lots of LNG to the U.S. It’s the same theme that I’ve noted before where a huge LNG project that was started several years ago when the paradigm in the U.S. was natural gas scarcity. A foreign provider sinks billions into a state-of-the-art LNG plant and creates a significant revenue stream from byproducts and liquids to subsidize the sale of natural gas, allowing the company to sell massive quantities of LNG at absurdly cheap prices. (Here is another article looking at the world market for gas and how shale fits in)

It’s a mixed blessing. On the plus side, the more LNG transported all over the world, the more international the natural gas world becomes. Oil, because it is a liquid, is much easier to transport than gas, so its market is worldwide and pricing largely is consistent between jurisdictions. Gas has historically been limited by the extent of pipeline systems, which can create significant geographic supply and pricing differentials. The ability to import LNG should also increase the perception of supply stability, giving greater comfort to end users to switch to natural gas.

But on the downside, bringing cheap LNG to the U.S. undermines domestic producers. Boosting supply with cheap gas serves to depress natural gas prices, limiting domestic production only to that which is the most economical. The domestic natural gas related industries are hurt and suddenly we are importing something that is produced here.

The savior for the U.S. this year has been higher prices in other parts of the world that has diverted deliveries. How long the differential lasts and the international demand keeps up is anyone’s guess. One thing it tells me is that the plan for a new Alaskan gas pipeline to the Lower 48 is a really bad idea if that gas is going to have to compete against shale gas and cheap LNG.

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