15 February 2013 09:41 [Source: ICB]
In recent weeks some US chemical industry leaders have been protesting loudly about the threat to their business from the large-scale export of liquified 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 are realistically 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 rise very 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 this 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 (8.5%) of current US consumption is more realistic.
The list of announced projects with completion dates of 2015-2018 we published in last week's commentary 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 of these 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 shows what is possible. To switch a naphtha cracker to ethane does not require large amount of capital expenditure.
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