Wednesday, January 9, 2013

Deloitte Study on LNG Export

This week, Deloitte Center for Energy Studies released a report commissioned by Cheniere Energy to study the global impacts of the export of liquefied natural gas (LNG) from the U.S.  The study was made public (I think) in an effort to limit the perception that LNG export would drive up domestic natural gas prices and disrupt the growing movement to develop the manufacturing and chemical industries in the U.S. based on inexpensive and abundant natural gas.

The conclusions largely mirrored those by NERA Economic Consulting in its report to the DOE as part of DOE's consideration of LNG approvals.  Among the highlights:
  • U.S. gas export would hasten the de-coupling of international natural gas contracts tied to the price of oil, especially as existing supply is displaced by U.S. exports and has to find a home.
  • Prices in LNG importing nations would decrease noticeably, but prices in the U.S. would be little changed.
  • The impacts to domestic supply and demand would limit the export capacity of the U.S.
  • Utilities likely would use less gas if prices increase, thus offsetting some of the supply claimed by exporters.
While the approximately twenty export applications on file contemplate the export of around 27 Bcf/day (by comparison, the current daily production level is approximately 65 Bcf YTD in 2012), nobody expects all of the proposals to be built.  Instead, the study assumes that only 6 Bcf/day would be exported.  To limit the endless permutations of export scenarios, the study considered simplified parameters such as exporting all of the gas to either Asia (Japan, Korea and India) or Europe (U.K. and Spain).  In all likelihood in the real world the U.S. exporters would target both markets.

As the chart below shows, in the Asian export scenario, the biggest supply displacement would be among Asian (41%), Australian (19%), former Soviet Union (FSU)  (14%) and Middle Eastern (14%) suppliers.  In the European scenario, the African (33%) and former Soviet Union (22%) suppliers take the biggest hit.

But, as the report states, "The reductions in volumes are not a result of direct displacement by U.S. LNG exports but rather due to global rebalancing of gas supplies."  The gas just goes somewhere else, most likely at a lower price than normal, which is especially vexing for folks like the Russians that charge among the highest natural gas prices in the world.  Ever wonder why Gazprom is constantly poo-pooing U.S. shale gas?

The bottom line is that U.S. LNG export will have global impacts but is not as likely to cause major market disruptions domestically.

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