Gas export move to ship US glut to rest of world

Traders in natural gas were jolted by a sudden leap in gas prices on a quiet Friday two weeks ago. The reason? The US had just authorised its first big exports of liquefied natural gas.

Washington’s decision has set the stage for some of the US’s gas glut to be shipped overseas, and for depressed domestic prices to rise to levels elsewhere in the world.

The export project, led by Cheniere Energy, marks a big step towards the globalisation of gas markets and will put the US in competition with exporters such as Russia and Qatar. If successful, the Cheniere project and others that follow could give consumers such as utilities more negotiating power. It also promises to shake up rangebound gas trading.

Gas trading takes place in rather disparate markets. In the US, for example, prices are based mainly on daily settlements at Henry Hub, a Louisiana pipeline nexus. In the UK, prices are pegged to the National Balancing Point benchmark.

In much of continental Europe and Asia, gas is often sold at a percentage of oil prices under multiyear contracts. So, the recent rise in crude prices has been excruciating for utilities locked into oil-linked supply deals.

The difference between the markets is striking. Henry Hub gas costs less than $5 per million British thermal units. NBP gas costs more than $9 per mBtu. The benchmark for east Asia, tied to oil via the “Japanese crude cocktail”, is more than $13 per mBtu, according to Platts data.

US prices are low because new shale rock drilling techniques have unlocked an estimated 100 years’ of supply in the world’s largest gas consumer.

Until recently companies were building LNG import terminals, including one at Sabine Pass, Louisiana, which Cheniere wants to expand for exports as soon as 2015.

Cheniere already has preliminary deals to supply LNG to companies including Endesa, the Spanish utility, Sumitomo, the Japanese trading house, and Morgan Stanley, the Wall Street bank, hinting at possible export destinations.

“For anybody who is buying a portfolio of gas today, having exposure to Henry Hub prices makes a lot of sense,” says Charif Souki, Cheniere chief executive.

An influx of LNG and depressed demand have already combined to push down spot gas in Europe, giving utilities the muscle to renegotiate long-term oil-linked contracts. Gazprom, the Russian supplier, has agreed to link some sales to spot prices. However, 69 per cent of the gas sold in Europe remains linked to oil, says Thierry Bros, gas analyst at Société Générale.

Japan, the world’s largest LNG importer, may start buying even more gas as a result of the nuclear plant crisis that followed the March earthquake and tsunami. Analysts expect Japan and other big Asian consumers to keep expensive oil-linked contracts to secure long term supplies.

The prospect of gas exports to pricier markets in Asia has not been uniformly welcomed in the US.

US public utilities and heavy industry claim the Cheniere project will lead to higher domestic gas prices. Two other companies have export proposals pending before the government.

“The US is the cheapest gas producer in the world right now, but the difference between long-term prices for US natural gas and LNG to Asia is going to start to narrow from now on,” says Daniel Jaeggi, head of trading at Mercuria, the Geneva-based energy trading house.

In its 50-page authorisation, the US Department of Energy has looked at the market impact of Cheniere’s plan to export as much as 2.2bn cu ft a day.

US production is currently about 60bn cu ft per day. The Cheniere project, it said, would cause a “modest increase” in domestic prices, but not “due to an alleged convergence of domestic natural gas prices with prices in certain international markets where the price of natural gas is linked to the price of oil.”

“Given the magnitude of domestic resources, we find that the proposed export activity is unlikely to alter the pricing mechanism for domestic natural gas production,” the department said. Mr Souki denies the project will raise domestic gas prices. “You’re basically taking stranded gas and selling it,” he says. “You’re not going to affect the price in New York City or any of the major consumption centres.”

However, the department said exports of US gas would help countries to broaden their supply base. “This will contribute to greater overall transparency, efficiency, and liquidity of international natural gas markets, encouraging a liberalised global natural gas trade and a greater diversification of global natural gas supplies,” the regulator said.