by Zoey Walden| Canadian Energy Research Institute

The unconventional gas revolution in North America (NA) has resulted in low continental gas prices. This has engendered interest both publically and privately to look into the prospect of exporting liquefied natural gas (LNG) in order to arbitrage low North America continental prices against high Asian prices.

The feasibility of substantial LNG exports from North America are constrained by the following economic and political themes: national energy security, supply flexibility, infrastructure and capital requirements, the nature of future LNG contracts, de-carbonization policies, nuclear policies, renewable energy policies, domestic gas prices, and unconventional gas development abroad.

North America exporters will also compete with potential newcomers and existing LNG exporters as well as deal with an increasing domestic natural gas price as new domestic end-users within the utility, petrochemical, industrial and transportation sectors emerge. The Canadian Energy Research Institute’s (CERI) Study No. 131 – Global LNG: Now, Never, or Later? – looks at global liquefaction and regasification capacities and addresses the question of whether there is room for North America LNG exporters in an Asian- Pacific market.


Global Liquefaction
The global natural gas market has experienced some profound changes recently. Over the last few years, LNG markets have witnessed a massive expansion in liquefaction production capacity with stranded supplies from multiple regions coming online combined with large additions from Qatar and more recently Australia.

As of October 2012 the world’s total liquefaction capacity could reach approximately 106.1 BCFPD (Billion Cubic Feet Per Day) or 806 MTPA (MegaTonnes Per Annum) if all projects were constructed. Figure 1 shows liquefaction capacity by region.


United States Potential Liquefaction
US imports and exports of natural gas, including LNG, are regulated under Section 3 of the Natural Gas Act (NGA) of 1938, and require approvals from both the US Department of Energy’s Office of Fossil Energy and the Federal Energy Regulatory Commission (FERC). Under Section 3(c) of the NGA, the import or export of natural gas to countries with which the US holds a free trade agreement (FTA) requiring national treatment for trade in natural gas, is presumed to be consistent with the public interest and must be granted authorization without modification or delay.
In order for the US DOE to authorize LNG exports to non-FTA countries, a notice must be issued in the Federal Register for comments, protests, and motions to intervene. Authorization to export LNG to non-FTA countries is to be granted unless it is deemed not to be in the public interest. Most of non- OECD Asia would fall under non-FTA countries.

There is a growing debate on the merits of exporting large quantities of US-produced natural gas. With the Henry Hub price of natural gas declining to ten-year lows, the energy-intensive parts of the US manufacturing sector, which include petrochemicals, steel, and fertilizers, are once again seeing healthy profit margins. Consumer groups, such as the Industrial Energy Consumers of America, have argued that restricting LNG exports would provide US manufacturers with a comparative advantage in the global market, increase exports of high-value products, and support economic growth.

Environmental groups oppose LNG export projects because shale gas drilling would concurrently increase. Also, if exports resulted in an increased domestic natural gas price, fuel switching from coal to gas would decrease, and result in relatively higher greenhouse gas emissions, compared to a scenario without LNG exports. Alternatively, some environmental groups support LNG exports because renewable energy technologies would become relatively more price competitive with natural gas as a fuel source for electricity generation.
In order to minimize the impact of LNG exports on the domestic price of natural gas, the US may allow domestically produced LNG to be exported, but gradually, so that producers have enough time to increase natural gas output. Table 1 summarizes US Liquefaction projects.


Canada Liquefaction
There are plans to construct six natural gas liquefaction terminals on the west coast of Canada. Together, these projects are estimated to have an export capacity of 7.8 BCFPD (59 MTPA). The province of British Columbia is expecting one liquefaction project to be constructed by 2018, with two additional projects to come on-stream by the end of the decade. It is also possible that two or more of the proposed liquefaction terminals could be combined in order to reduce development costs. Unlike the US and Australia there has been support for Canadian LNG projects. Table 2 summarizes the Canadian projects.


Asia-Pacific LNG Demand
The number of Asian LNG importing nations is expected to increase. Traditional LNG exporters such as Malaysia and Indonesia, along with other southeast Asia countries, are becoming LNG importers as traditional gas fields become depleted.
LNG imports are also increasing in countries that lack pipeline infrastructure to meet their growing needs. However, utilization of LNG import terminals in this region is dependent on how competitive imported LNG prices are to alternative fuels. It does not make sense for these countries to procure LNG at prices of 16-17 dollars/ MMBTU and thus high oil and LNG landed prices may slow the development of LNG import terminals in this region.

Figure 2 depicts the forecasted natural gas demand and the amount supplied by pipeline and LNG. As shown in Figure 2, Asia-Pacific is expected to remain a significant LNG importer. China especially is expected to be a rapidly growing LNG market. There are significant uncertainties regarding China such as the ability to receive supplies from Russia, and the development of shale gas resources. However, since China does not possess significant infrastructure for shale gas development to meet its growing natural gas demand, it is still expected to be a future LNG importer. Furthermore, India is expected to reach its regasification capacity soon. There may be more offshore development in India but India will increasingly rely on foreign gas supplies in the future. Some may be met by the controversial TAPI pipeline while the rest will be made up with LNG imports.

Asia-Pacific has usually had a surplus of regasification capacity available. This is partly due to countries like Japan and Korea not having substantial storage capabilities and not having regional interconnectors. Furthermore, China’s policies usually result in an allocation of resources with state-owned companies having a specific allocation to end-users. Even if there is an increase in demand there could be a mismatch between the commodity allocation and the amount of LNG trying to access the market. This is both good and bad for producers as these dedicated capacities support long-term contracts but may make it difficult for future LNG suppliers to access these markets if the stateowned companies have already maxed out their natural gas allocation (IEA 2012. Medium-Term Gas Report 2012).


Firm Contracts
There is uncertainty regarding the future of long-term oil-linked formulas, but new projects are still able to secure some long-term contracts, as seen in Figure 3. Australia has secured long-term oillinked contracts for their liquefaction plants with an oil-linked formula that contains a slope of between 0.13-0.15. While most of the Australian contracts are with Japanese utilities, the Japanese have expressed concern over being linked to rigid contracts and have looked to shorter-term contracts.
Currently, the spot market covers about a fifth to a quarter of trade and it is questionable what the rate of expansion will be in the future as there are constraints in available transportation. Angola LNG is planning on delivering spot cargoes and Qatar and Peru have been willing to do short-term contracts (<4 years). Despite these developments, major expansion in LNG is expected to come from Australia which has committed volumes and from the US which also has committed long-term contracts. However, the US does not have a destination clause and it is possible some of the volumes may be swapped or sold as spot cargoes. Figure 4 may be misleading in that many contracts come up for renewal every few years and what appears to be large uncommitted volumes may in fact become committed in contract renegotiations.


North American LNG Export Opportunities
There is concern that the window of opportunity for North America LNG projects may be closed by the end of the decade. The increase in LNG supply combined with high natural gas prices in Asia have led to an erosion of traditional LNG contracts. This has resulted in contracts being created that are linked to fuels other than oil. Most famously is Sabine Pass with their Henry Hub-linked formula.

How much of a transition away from oil-indexed prices towards other commodities such as gas-hub price indexation is still subject to ongoing debate. This will have implications on future gas pricing but so far it is not expected that there will be a global price convergence as the global LNG industry still relies on long-term contracts. The growing spot market should continue to drive alternative contracts due to increased flexibility of supply. The spot market emergence threatens projects that require a long-term oil-linked contract to be profitable. In addition, if both oil-linked and natural gas-linked contracts dominate the market, oil prices drop and NA natural gas prices rise, this will lead to a convergence between the two pricing formulas. However, Asian buyers still seem willing to negotiate long-term contracts for energy security which supports the retention of an Asian premium for a while yet.

Currently, China’s expected natural gas growth combined with nuclear retirement capacity in Japan could create a supply short-fall in Asia until about 2015. As multiple large-scale projects begin to come online beyond 2015 from Australia and the US, this supply shortfall will begin to lessen as long as there are vessels to export supplies. Thus the question is not if but how much room is there for North America projects in the Asia-Pacific region? Figure 4 depicts the future LNG demand in the Asia Pacific region and the different suppliers meeting this demand. In Figure 4 there is a tightening of the market around the year 2019, around the time when major Canadian projects are expected to commence. Since most major liquefaction additions will happen after 2015, the global liquefaction industry will be in favour of sellers; however, as multiple players try to access Asian markets there will be a constraint around 2020. Asian demand is expected to meet supply and thus there is room for NA suppliers in an Asian market if the US does not proceed with all planned projects.
However, there are several constraints. Liquefaction costs have been increasing substantially which means that new liquefaction players may have difficulties securing capital and long-term oil-linked contracts. Consequently, with concurrent rising capital costs and alternative contracts, liquefaction projects may not be able to get the rate of return on their projects that their predecessors did.

Moreover, the regions of expected growth (China and India) do not have the high prices of their island neighbours (South Korea and Japan). Figure 5 shows the value chain of different suppliers and an expected price. Newer Australian projects must access island LNG importing countries in order to obtain a reasonable rate of return. Canada and the United States are competitive for both island and mainland Asian countries. If Canadian projects have significant cost overruns, similar to what happened to Australian projects, it is possible that Canadian projects will be barely economic.
Brownfield US projects are very competitive and are held back only by the high transportation costs to move LNG from the Gulf of Mexico to Asian markets. The Panama Canal expansion will help to lower these costs signifi- cantly. Other external factors include the development of unconventional gas resources in primary target markets, such as China and India; competition from pipeline natural gas suppliers, or alternative fuels; and rapid deployment of renewable energy technologies, including low cost energy storage. In conclusion, there is room for NA LNG exporters in a global LNG but it is beneficial to be an early entrant.