GPA ’15: US LNG wave spurs new contract pricing

Managing Editor

SAN ANTONIO -- At the Tuesday afternoon LNG Forum at the Gas Processors Association's Annual Meeting in San Antonio, Texas, Tom Seng of the University of Tulsa shared his views on the state of the US LNG export market. 

Seng opened his talk by asserting that new gas markets are needed in the US. "Why do we need new markets?" Seng asked. "When we started to realize that the shale [gas plays] would be so prolific, we knew we needed new markets for this gas."

US shale boom enables LNG success. In 2014, US natural gas supply was approximately 74.7 Bcfd, a 6% increase from 2013. Forecast supply for 2015 is 75.7 Bcfd. 

The largest demand sectors for gas in the US are power and industrial. Together, these two sectors consume large volumes of gas; however, a surplus still exists. The solution to this oversupply, Seng said, is LNG exports.

At present, the US—which was expected to be a net importer of LNG prior to the shale boom—exports liquefied gas from just one location: ConocoPhillips' Kenai, Alaska LNG terminal, which has an export capacity of 200,000 MMBtu/d. 

However, the US also sees "virtual" exports of gas in the form of truck deliveries of LNG to Mexico, as well as the re-export of LNG tanker loads destined for the US and the re-sale of stored LNG in aboveground tanks. 

The US market has surplus gas supplies of 3 Bcfd over domestic market demand. "However, we have existing LNG import facilities, so that gives us advantage to get going" on exports, Seng said. 

"We also have a competitive natural gas market," with a futures contract at Henry Hub in Louisiana. This means the price of gas can be set with futures contracts, "which works well with long-term LNG contracts," Seng said. 

Global LNG market movements. Seng also gave an overview of global LNG trends, noting that a burgeoning imbalance of supply and demand will force changes in the market. 

LNG supply is expected to increase from the US, Australia, Russia and East Africa. Approximately 70% of the world's LNG imports will land in Asia-Pacific, with Japan consuming 37% of the total. 

Demand drivers for LNG consumption include less nuclear power usage, spurred by the Fukushima disaster in Japan; economic growth in China and India; and a forecast jump in global gas demand of 2%/yr through 2035. 

Seng forecasts LNG supply growth of 8%/yr through 2020, with an additional 48 Bcfd of LNG supply entering the market by 2035. The majority of this volume will come from Australia (16 Bcfd), the US (14 Bcfd) and East Africa (12 Bcfd). 

Meanwhile, number-one LNG exporter Qatar will fall to the third-largest exporter by 2020 as supplies from the new LNG exporters dominate the market.  

LNG contracting. Traditional LNG contracts are long term and linked to oil prices. These contracts are still the most widely used pricing mechanism, which will take some time to dismantle, Seng said. 

A new era in contract pricing will see Henry Hub gas-based pricing for US exports. For its Sabine Pass LNG export project, Cheniere Energy plans to set contract terms of 115% of the Henry Hub price plus a "tolling" fee (i.e., the cost of liquefaction). 

Alternative arrangements for LNG contracts include direct investment in LNG export assets, as well as other types of tolling agreements. 

LNG will also change the US pipeline landscape. Gas from the Marcellus and Utica shale plays will be shipped to the US Gulf Coast and Southeast US LNG markets on a number of new pipeline construction and expansion projects, Seng said. 

The GPA 2015 Annual Meeting runs from April 12–15 in San Antonio. The Association plans to hold its 2016 Annual Meeting in New Orleans, Louisiana, from April 10–13. 

The Author

Related News

From the Archive



{{ error }}
{{ comment.comment.Name }} • {{ comment.timeAgo }}
{{ comment.comment.Text }}