Articles from 2013
US LNG prices to Europe. How much?
- Written by Nick Grealy
- Published: 30 September 2013
The price of natural gas is a complex enough subject as it is. I won’t write a book, since OIES already has, but gas pricing is a multi dimensional chess game, with dozens of different variables.
That doesn’t stop some looking to simplify it, as we see from former Energy Secretary Chris Huhne’s rather convoluted logic in the Guardian today, where he appeals to the US to export their LNG to the UK to lower prices.
North American LNG exports are clearly on the cards anyway, and it’s a sign of multi-dimensionality that whether or not US molecules physically arrive in the UK or not is irrelevant. Huhne’s thesis seems to be that US LNG is better than UK fracking because UK produced gas would only be exported to Europe via the Interconnector link, thus making UK shale gas production irrelevant in price terms.
UK and European markets have been linked from the day the Interconnector opened, and each influences the other. A US cargo arriving in the UK will increase the supply of gas in the UK and lower prices. That in turn will go affect prices through the Interconnector just as easily as UK shale production would. In this respect, we’ve seen for the past few years that the UK is not Airstrip One, but simply a rather big and complex LNG jetty that pushes even Qatari imports into Europe’s hub markets and thus lowers continental oil indexed prices.
Two further holes in the Huhnian logic:
US LNG exported anywhere will lower prices. If it goes to Asia or South America, it pushes down LNG prices there, which pushes down LNG prices in the UK by a broadly similar level.
US LNG exported to the EU LNG terminals to European terminals will lower the international price of gas too. The misconception uniting Huhne, Miliband and Cameron, is one where international prices are inherently, and eternally, on a volatile upward path. That is the logic which Huhne and others have long used to make competing fuels, nuclear or renewable, cost effective.
The reality is that the US shale bounty will find it’s way to world markets anyway via complex mechanisms that few reporters have all morning to understand.
The question is how much will the gas cost? The production, or in this case the arrival price of US LNG in Europe provides some pointers, exclusive again of multiple variables. I see US LNG as providing the margin price of gas in Western Europe whether it shows up or not, so what could that price be? LNG prices are made of the gas cost, transport from gas field to terminal, liquefaction in the US, transport (which depends on voyage length) and terminal costs on this side. What the costs actually are depends on who you ask, but if US LNG were exported today, we’d be looking in the area of $8MMBTU, a twenty percent drop from current prices. Here's Bentek Energy from last year on the subject, and it's not too different today, although it does depend on oil prices broadly similar to the pre-Iran opening world:
One reason I went to the Global LNG Congress in London last week was to better understand price formation metrics behind LNG prices UK and EU shale gas will need to compete with. UK prices will be higher than US prices for some years unless we have a wall of production from the UK and the rest of the EU. The prices will basically be US prices plus the cost of transport to Europe (or Asia).
The mystery I have is understanding why US service companies who are now seeing significant over capacity in drilling and HF horsepower leading to a price war pushing down costs even further at home aren’t piling into the the European shale market. To be fair, I think it is happening and we’ll see some examples soon, but for now there are hundred dollar bills all over the European gas sidewalk and sooner or later people will start picking them up.
As an aside, at the Congress in London last week, it was deja-vu all over again as brand name and high paid energy consultants were insisting to Asian buyers that shale gas wouldn’t change anything. Why shouldn’t they? They had been doing this for years and it worked, and the multi billion money behind LNG terminal constructors and operators can afford them. I’m struck that the “experts” now provide the same spiel to big LNG that they, or others do, to Gazprom: shale is years off, high decline rates, environmental issues etc etc. Sound familiar? Using the same arguments that failed in the US from 2008 and are rife in Europe today, they try to spin mirage theory 2013. Same crap, different year. This year, oil linked LNG gas producers were telling buyers don’t concern yourself with shale gas in China, since it won’t happen until the 2030’s.
So the question Big LNG (led by BG Group, the LNG Gazprom) wanted Asian buyers to ask themselves was do they feel lucky betting on a new world of abundant and secure natural gas and China shale and US LNG pushing down prices. Betting against China? Who wants to be on that side of the bet?
What is different these days is how Asian LNG buyers are informed by a new generation of expert opinion based on US and European shale reality. Which explains why they are so often smiling after they speak to me and US consultants.