Profits from US natural gas exports could disappoint, researcher says

HOUSTON — New natural gas export terminals in the U.S. might not be as profitable as once imagined — at least for a few years — due to overbuilding, a new study from Rice University warns.

From about 2016 to 2025, the cost of liquefying natural gas in the United States and shipping it to Asia likely will exceed the difference in the commodity’s price in the two regions, according to the study, released this week.

Today, natural gas costs more than $18 per million British thermal units in Asia, while the U.S. price generally has held below $4 per million Btu during the past couple of years — although it’s climbed over $6 recently, driven at least partly by winter heating demand.  The higher price natural gas commands overseas has helped fuel a rush to build liquefied natural gas export facilities along the Gulf Coast and in Canada, as producers view Asia as a major opportunity for big profits.

But as new U.S. export terminals come online and other nations flood Asia with natural gas, the price there will drop, said researcher Kenneth Medlock, senior director of the Center for Energy Studies at Rice’s James A. Baker III Institute for Public Policy.

“The capacity that’s added will result in a price impact in the Asian market that’s pretty dramatic,” said Medlock, who wrote the report, in a conference call with reporters this week. “Not until a decade later will prices settle in.”

Price gap: Asian nations eagerly eye cheap US natural gas

U.S. natural gas prices have plummeted with the spread of shale gas drilling, while demand has kept the  price significantly higher in Asia. Natural gas producers have struggled to meet Asia’s power needs in the wake of the 2011 earthquake and tsunami that knocked the majority of Japan’s nuclear power capacity  offline. That increased demand for natural gas to fuel power plants and sent gas prices in Asia  to unprecedented levels.

U.S. regulators have permitted six liquefied natural gas  export facilities and more are seeking approval. Meanwhile, other countries are rushing to supply Asia with natural gas, too. Shale production in China; pipelines from Russia, Central Asia and South Asia; and LNG exports from Australia and East Africa all seek to capitalize on the high price of gas in Asia.

It could be too much too fast, at least for a while. Medlock called the situation “a classic overbuild on the part of the industry.”

According to Medlock’s analysis,  natural gas in Asia will continue to command a higher price than in the U.S. from 2016 through 2025. But the gap will narrow, and the cost of liquefying it and shipping it to Asia will exceed the difference in price.

In 2025 and beyond, the long-term price differentials between the U.S. and Asia will be comparable to the cost of trade, according to Medlock’s analysis.

As a result, the U.S. probably will slow the pace of developing LNG export capacity, he said.

William Frohnhoefer, an analyst with BTIG LLC in New York, disagreed with Medlock’s conclusions.

He believes the infrastructure needed in Canada, Russia, Africa and Australia to export natural gas to Asia will come online much later than the Rice analysis suggests –if it comes online at all.

By contrast, Houston-based Cheniere Energy, the first to receive a permit for exporting natural gas to countries that don’t have free trade agreements with the United States, has said its Sabine Pass liquefaction project in Louisiana’s Cameron Parish will be in service next year.

Cheniere Energy did not respond to requests for comment on the Rice report. Houston-based Freeport LNG, which is developing a natural gas export plant in Brazoria County, declined comment.

Frohnhoefer said many of the international projects are in remote places, where they would be tied to nearby production and exploration. That makes them a “100 percent resource risk,” unlike the U.S. projects, which already have  access to natural gas pipelines from producing fields.

Stephen Schork, editor of the Schork Report, an industry newsletter covering natural gas prices, said the Rice study draws realistic conclusions — but he cautioned that long-term forecasts of energy prices are notoriously difficult.

“High prices are the best cure for high prices,” Schork said. “Everyone is going to flood the Asian market, and certainly we are going to see some competition for these LNG exports.”

“It’s going to remain a difficult slog,” he added. “Bottom line: I think this paper has some validity to it.”

The result of Medlock’s simulation, and others, will be presented Friday at a conference on the Geopolitics of Natural Gas at Rice.

Also on FuelFix:

Cheniere’s massive export plans rise on Gulf Coast (video)