Monday, January 7, 2013

A Bearish View on the LNG Export Market

Last week, the New York Times published a good piece on the market potential for exporting natural gas via LNG terminals.  It was a balanced piece that looked at the worldwide market for gas and suggested that the changes created by the North American shale gas rush will continue to ripple through the international market and ultimately may limit the potential for North America to export gas.

There are nearly twenty LNG export applications pending now, but only Cheniere Energy has approval from the federal government to export gas to countries without free trade agreements with the U.S., a critical step required by the market to finance an export facility.  The article points out the headwinds facing export, including "upward pressure" on domestic gas prices based on improved fundamentals that will make North American gas more expensive than it is now (my personal favorite), the gradual uncoupling of natural gas and oil prices in Asia and Europe and the export of shale drilling technology.

These are all good points, but I still believe we will see a handful of facilities built, including at least three around the LA/TX border, which would be very beneficial to the Haynesville Shale.  Ultimately, however, a combination of market forces and logistical constraints will cap the number of export facilities in the mid single digits, and the developers that already have an import facility gathering dust will have a nearly unbeatable advantage.

LNG export will come, but I think its potential to jack up prices in the U.S. and greatly increase production has been overblown.  LNG will be another "leg of the stool" in terms of demand and will help diversify consumption, but it will not be a primary driver.

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