I'm not going to go into too much detail here because it's a very complex subject and one too lucrative for me to give away here, but would it be possible for US production to eventually serve the same sort of function for natural gas that for example the Brent index does for oil? Let's remember Brent is a benchmark not a tombstone. No one is paying the same price in Gippsland or Dubai or Curacao,but people are paying variations on a Brent theme. Brent became a benchmark thanks to liquidity built on transparency and huge volumes. Ironically, Brent production itself is actually declining, but that's another story.
In natural gas, the US market is easily the most transparent, liquid and well-supplied in the world, but US prices are not being transmitted overseas by the lack of physical connections to the rest of the world.This will change from 2015 onwards as LNG exports are planned from both the US and Canada. So far, every existing LNG terminal in the US with the exception of Everett near Boston is gearng up to export. We've recently seen surprising news of export plans from Elba Island Georgia and Ensenada Mexico, neither one of which is near any gas production at all.
US LNG terminals are proof positive of how the conventional wisdom was wrong. Remember St Greenspan? He was the guy who constructed the financial economy pre 2008. He was the hero of 1998/2008 and today he's the goat. Not only was he the world expert on how wonderful the economy was doing, he had to put his two cents in on US LNG security. This from 2003:
In the summer of 2003, former Federal Reserve Chairman Alan Greenspan appeared before a congressional committee to share his thoughts about the U.S. natural-gas market. It might have been better for the industry, and some investors, had he kept those views to himself.
To stabilize the market, Mr. Greenspan said, the U.S. needed to become a major importer of liquefied natural gas, or LNG. Moreover, he added, "Access to world natural-gas supplies will require a major expansion of LNG terminal import capacity." New facilities would have to be built in the U.S. to handle the expected surge in imports.
When I first started talking US LNG exports only two years ago, people thought I was nuts, but now Ed Morse at Citi can write a report called Energy 2020: North America as the new Middle East, which contains something Statoil were nodding and winking about two years ago but would never admit in public: exports of Marcellus gas as LNG via Cove Point Maryland. This from page 51
If Marcellus production were to keep increasing, given its vast resource base, low cost and proximity to major demand centers in the US, could a separate gas price benchmark emerge, in parallel with the traditional Henry Hub benchmark in Louisiana? It is an idea that has been advanced in the industry, including by Michelle Foss at the University of Texas, Austin. This would be similar to what has happened in the oil market, where Brent, West Texas Intermediate (WTI), Dubai, Urals and, to a lesser extent, Cinta have come to define benchmark oil prices in Europe, North America, Middle East, Former Soviet Union and Southeast Asia, respectively. And in the US and Canada in any event there are already other pricing hubs, including AECO in Canada.
It gets even better:
Most important, LNG export terminals perhaps at Cove Point in Maryland, and other locations along the Northeast, could bring Marcellus gas to Europe, forming a bilateral price link between the Northeastern US and Northwest Europe, where NBP is the price hub. It is almost akin to the development of the Interconnector pipeline between the UK and Belgium. The Interconnector was instrumental in bringing gas, as well as the price impact of UK’s NBP, to continental Europe. Similarly, with LNG exports from the Marcellus, although the distance would be much greater, the price signal established in the US Northeast could be transmitted more rapidly to Europe. The ability for US LNG exports to respond to expected demand increases or decreases in Europe within days, rather than weeks as with Middle Eastern LNG, could be the key in forming closer linkages between Trans-Atlantic gas prices.
I would even add, going to Fantasy Island LNG terminal here,if we assume shipping wasn't an issue, US shale gas could arrive at the NBP via Milford Haven LNG only a couple of days after Russian or Turkmenistan molecules makes the long pipeline journey to the NBP via the Interconnector. The story is no more far fetched than several other accidental by-products of the shale revolution. The Citi report is two months old already, which is almost out of date by shale standards, but since then, apart from official confirmation of Tokyo Gas's interest in Cove Point exports note more from the Marcellus here to flesh out the idea:
A new report from Bentek Energy, which examines national industry trends, estimates that even if companies stopped drilling new wells in northeast Pennsylvania, production could grow by 31 percent over the next 16 months as the partly drilled wells get hooked up.
I noted here last month how US LNG exports from the Gulf depend on essentially free gas that has nowhere else to go. The idea that we could see the same problem developing five days sailing away bodes as well for UK gas prices as badly as it does for UK government policies built on rising prices.