Listening only to the more vocal, sometimes hysterical opponents of US LNG exports might remind us of periods in US history when isolationists ruled political and economic thinking. "American energy for Americans" is catchy (if mindless) but ignores both the lessons of history and the logic of global economics.
To hear some, you'd think exporting natural gas as LNG would immediately—or at least very quickly—drain supply so drastically as to force US residential consumers to freeze in winter cold and suffocate in summer heat. US gas-dependent industries at the same time would quickly go bankrupt from the consequent fly-up in prices.
A recent analysis by LNG consultant Jim Jensen injects some badly needed rationality into the discussion that should remind energy consumers and their politicians that we live in a highly connected world—and we're much better off for it.
Myths
One myth Jensen explodes is the idea that anything close to the number of projects proposed for US LNG export will actually be built. Global LNG production, he says, has always had "far more proposed projects than will ever see the light of day."
At yearend 2012, current probable ("final investment decision likely") and possible ("proposed start-up date") projects alone reached 747 million tonnes/year (tpy) in capacity—2.7 times industry's global installed capacity. Proposed US Lower 48 projects at yearend 2012 reached 175 million tpy, 24% of all proposed projects in Jensen's database and 63% of total current global capacity.
Simply put, logic and industry history point to a limited number of US export projects being built by 2025. Jensen, under some conservative market assumptions, believes US export capacity will build slowly to 7.7 bcfd by 2021.
He also addresses the role of gas supply contracts in determining likely export volumes. Considering 2007-11, he has counted 18 LNG trains starting up, averaging 3.5 contracts/train. A two-train greenfield LNG project, therefore, would require 7 contracts.
So, "just how many different customers are out there that are interested in signing a contract?"
He says that most US projects are being sponsored by companies with little international LNG marketing experience. Although the US Department of Energy may approve many projects, the "competitive international market will prove to be a stern disciplinarian."
Finally, Jensen looks at the notion that upward pressure on US prices by global demand will "undermine US industrial competitiveness."
The flaw in that fear is the conflation of the concept of world oil prices with "world gas prices." We cannot talk about world gas prices, he says, because natural gas, like local French wines, "does not travel well."
He's referring, of course, to the three distinct though connected global markets for gas: North America, Europe, and Asia. And he explains how the different pricing mechanisms in each region, while evolving, have yet to converge into a widely accepted single market.
Another dynamic
Jensen's analysis focuses on the interplay of global LNG production with global natural gas demand. Beneath the surface of his analysis runs another, more-US supply and pricing dynamic.
For some time, US producers in shale plays have reduced production of natural gas, where they could, in favor of increasing production of more valuable associated NGLs. The result is a large volume of gas left in those reservoirs, waiting for higher prices to draw it out.
Siphoning off a moderate amount of gas into LNG export will leave room in price-depressed US gas markets for more to be produced, attracted by the consequent moderate rise in currently very low—by global standards—prices.
The end of all this is that neither consumers nor their politicians need worry about inadequate supply of natural gas or crippling, suddenly higher prices. North America's highly liquid and responsive open markets will take care of those worries.
