INSIGHT: Think again on US LNG

15 February 2013 16:49  [Source: ICIS news]

By Will Beacham

LONDON (ICIS)--Some US chemical industry leaders in recent weeks have been protesting loudly about the threat to their business from the large-scale export of liquefied natural gas (LNG) based on shale.

But just how much of a danger will it be in reality?

They are concerned that the massive feedstock cost advantage currently enjoyed will be diminished if a large proportion of this gas is exported.

Feedstock prices would rise, jeopardising the renaissance of the US chemical sector, based around the construction of a large number of ethylene expansions this decade.

However, some industry experts are questioning just how big an impact LNG exports realistically are likely to have on the US advantage.

Even if US natural gas (and ethane) prices do rise, the rise is likely to be modest – Henry Hub prices are forecast to increase only gradually by 2025 to around $7.50/MMBtu. Meanwhile in other regions of the world – excepting the Middle East – gas prices are still largely tied into oil prices and oil is not forecast to get any cheaper.

US LNG exports are unlikely to lead to a globalising of the natural gas price. There are significant costs of $6-8/MMBtu associated with liquefaction and transportation, as the table shows. These costs, according to ICIS Heren LNG analyst Simon Ellis “will lock in the competitive advantage enjoyed by the US because of this large fixed cost element.”

He adds: “US LNG exports might put a ceiling on global LNG prices but also have the potential to impose a substantial floor level, well above that paid by domestic gas buyers.”

A December 2012 study – by NERA Economic Consulting – and commissioned by the US Department of Energy, suggests that US LNG exports could reach up to 12bcf/day, equivalent to 17% of the size of current US gas consumption.

However, most LNG exporters say a 6bcf/day scenario, or 8.5% of current US consumption, is more realistic.

The list of announced projects with completion dates of 2015-2018 published in ICIS Chemical Business (ICB) in its 11 – 17 February issue is impressive, and if realised would amount to 25% of US consumption.

But some commentators suggest these follow something of a “gold rush” mentality so very few are likely to be realised.

Meanwhile, ethane, which costs a lot less than LNG to transport – could go global. The infrastructure is not yet in place but the recent deal by INEOS to ship ethane from Marcus Hook in Pennsylvania to Europe shows what is possible. To switch a naphtha cracker to ethane does not require a large amount of capital expenditure.

Looking out longer term, there are suggestions that the huge discoveries of natural gas in North Africa, Tanzania, Mozambique, Australia and elsewhere combined with increased demand could lead to a greater globalisation of the gas market. Gas prices everywhere could become more divorced from crude oil.

Andy Steinhubl, vice president at consultants Booz & Company said: “Because of the surge in both supply and demand of natural gas we will see the creation of more of a global market for gas similar to crude oil and gasoline.

If that happens, and the price of gas declines outside of North America, the economics of exporting large volumes of LNG from there could begin to look shaky.

Total LNG transport cost 2015 ($/MMBtu)

China/India

Europe

Korea/Japan

Regas to city gate pipeline cost

$1.50

$1.00

$0.50

Regas cost

$0.88

$0.83

$0.90

Shipping cost

$2.87

$1.33

$2.60

Liquefaction cost

$2.14

$2.14

$2.14

Wellhead to liquefaction pipeline cost

$1.00

$1.00

$1.00

Total LNG transport cost

$8.39

$6.30

$7.14

Source: NERA

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By: Will Beacham
+44 20 8652 3214



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