LNG Prices Shaky as DOE Approvals get NERA

The second of two Department of Energy reports on the impact of LNG exports on the US economy was published last week by NERA. These reports focus on macroeconomic impacts that do little to guarantee the investment returns of the 15 projects awaiting approval. Today we dig into the pricing mechanisms that have to work for buyers and sellers before these terminals can lock in the throughput they need to justify their investment.

LNG Recap

First a quick refresh on the basics on LNG or liquefied natural gas. The process of liquefaction lowers the temperature of dry natural gas to -2630 Fahrenheit causing it to liquefy.  In its liquid state 600 standard cubic feet of natural gas take up only 1 cubic foot of space, making it economical to transport between continents in specially designed ocean tanker ships. Known as “trains”, large scale liquefaction plants are seriously huge investments costing anywhere from $2-$8 Billion (MIT estimate). In previous RBN Energy blogs we looked at the project economics of the 15 United States LNG export projects awaiting DOE approval (see Export Boom or Import Echo) as well as the 3 proposed Canadian West Coast projects (see Lonely Gas Surplus Seeks Long Term Overseas Relationship).  

The DOE Reports

Why did the Department of Energy (DOE) commission reports about the impact of LNG exports?  The DOE has the authority to approve LNG exports to non Free Trade Agreement (FTA) countries. Since the main LNG demand is from non-FTA countries, the development of US LNG exports is contingent on DOE approval. That approval has so far only been granted to one terminal in the US – the Cheniere Sabine Pass project that is expected to go online in 2015. Before approving more LNG exports, DOE awaits comments on two reports designed to identify the impact of LNG exports on the US economy. The first of these reports was produced by the DOE’s own Energy Information Administration (EIA) in January 2012. The EIA report (copy here) looked at various scenarios for increasing LNG exports and basically concluded that natural gas prices would increase as a result, along with natural gas production to meet the increased demand. The publication of a second report, commissioned by the DOE from the NERA consulting group (copy here) was delayed until December 3, 2012 – most likely because of the Presidential election. The NERA report included more in-depth modeling of the impact of various LNG export scenarios (63 of them to be precise) on the demand for LNG as well as the net impact on the US economy. NERA concluded that LNG exports are good for the US economy in all circumstances – meaning that those sectors of the economy that suffer due to higher energy costs are outweighed by the general good caused by higher exports (e.g. from reduced balance of payments, higher natural gas employment etc). NERA also concluded that natural gas prices in the US would only increase so long as LNG exports remained competitive. In other words, once US gas prices make LNG exports too expensive then those exports will decline. Commentators have generally perceived the NERA report to be favorable to DOE approval of exports.

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