Go West - Red-Hot Natural Gas Markets Help Push North American LNG To Asia

With multiple energy markets around the world facing natural gas shortages, buyers are clamoring for more LNG. Pre-winter panic-buying has sent global gas prices to record highs yet again in the past couple of days, and even hauled Henry Hub gas futures up to new post-2008 records above $6/MMBtu in after-hours and intraday trading. With the incredible run in global gas prices, U.S. export economics have looked extremely attractive for nearly a year now, and you would think that buyers would be lining up for new liquefaction capacity in the U.S. Well, it has certainly drawn prospective offtakers back to the table. But they are wary of rising export costs and committing to projects long-term given the questionable future for hydrocarbon markets. Additionally, Europe’s rising piped gas imports from Russia and overall declining demand in the region have put long-term prospects for European LNG imports, in particular, on shaky ground. So, access to Asia is more important than ever for new LNG development, a key selling point for projects on North America’s Pacific Coast, both because of proximity to Asian markets and the absence of canal fees or constraints versus the Gulf Coast. There are no LNG export terminals on the Pacific Coast currently, but two projects — LNG Canada in British Columbia and Sempra Energy’s Energía Costa Azul (ECA) LNG in Baja California, Mexico — are under construction and due online mid-decade. Those projects are unlikely to be the last, given the more than $1/MMBtu in cost savings due to shorter voyage times and canal-free access to Asia. In today’s RBN blog, we begin a series looking at the state of LNG development on the North American Pacific Coast.

Back-to-back LNG blogs? We normally like to mix it up when it comes to blog topics. However, the past two days have been anything but normal in the gas markets. Global gas prices were already in the midst of the most epic bull run in modern times, if not ever, with gas prices abroad pushing to new highs all summer and into fall. This has been underpinned by strong global gas demand and a gas shortage in Europe (see It’s Too Late), but now a coal shortage in China has sent the market into another upward spiral as the entire world weighs the impacts of multiple countries facing energy shortages and winter reliability fears. This has sent Asia’s Japan Korea Marker (JKM), Europe’s Dutch Title Transfer Facility (TTF) and the UK National Balancing Point (NBP) to all-time highs yet again this week. The U.S. gas market is tight as well, but it’s not facing the same kind of shortages. Even so, gas prices here have been unable to escape the upward pull. The October Henry Hub gas futures surged nearly 60 cents (11%) on Monday — the biggest single-day gain in nearly three years — to record a new post-2008 high of $5.706/MMBtu, despite little change in domestic fundamentals. Then, in after-hours trading Monday night, the prompt contract blasted past the $6/MMBtu mark and again topped $6/MMBtu in early trading Tuesday before expiring at about $5.84/MMBtu. This, as JKM reached a high-water mark just under $30/MMBtu. The linchpin for these dramatic price moves is of course LNG. Yesterday, in Hear My Train A Comin’, Part 2, we looked at the near-term impacts of rising LNG export capacity on U.S. gas demand, with commissioning for both Sabine Pass Train 6 expansion and the new Calcasieu Pass facility well underway and first LNG exports expected this winter. Next, we shift our focus longer-term to another aspect of the all-important LNG supply picture: the economics of North America’s Pacific Coast vs. Gulf Coast export projects.

Before we dive into why the Pacific Coast is such an attractive location for LNG development, we need to review the basic economics around North American LNG exports. RBN utilizes an export cost model to track the economic viability of delivering U.S. LNG to destination markets. We first introduced this model in Sultans of Swing, where we went through the various costs in detail. Figure 1, below, shows a snapshot of our economic model for exports from the U.S. Gulf Coast (where a majority of exporters are located) to Asia via the Panama Canal, the lowest cost and most popular route for the bulk of U.S. LNG exports to Asia. Note that these costs are based on middle-of-the-road or midpoint assumptions, whereas, in reality, they can vary based on a host of factors and each offtaker’s contract or even individual cargo sales.