LNG Exports from North America

July 2012

• The rise of shale gas production has turned what was often a tight domestic supply-demand balance into a supply glut and has led to predictions of the US becoming a net exporter of natural gas, including LNG, alongside traditional exporters such as Qatar and Canada.
• North American consumers, the current beneficiaries of relatively low natural gas prices, may initially be alarmed by this development.
• However some studies suggest that the perceived negative economic effects of greater LNG exports may be exaggerated as the degree of domestic price increases caused by exports would be limited by market forces.

In April, US regulators approved the establishment of a project to export liquefied natural gas (LNG) from Sabine Pass, Louisiana, while the Canadian government approved a 20-year licence for an LNG Export Co-operative to export from Kitimat, BC. Only four years ago, the prevailing consideration for LNG vis-à-vis North America (the US in particular) was the need to import gas, given forecasts of dwindling domestic production. However the rise of shale gas production has turned what was often a tight domestic supply-demand balance into a supply glut and has led to predictions of the US becoming a net exporter of natural gas, including LNG, alongside traditional exporters such as Qatar and Canada. North American natural gas producers would certainly welcome opportunities to reach European or Japanese markets where unit prices are approximately $9 and $14 US/MMBtu higher, respectively, than on NYMEX.

North American consumers, the current beneficiaries of these relatively low natural gas prices, may initially be alarmed by this development. Industrial users will be concerned that the export of cheap natural gas will eliminate their cost advantage. Opponents of coal-fired power generation would have reason to watch closely the development of LNG exports as natural gas-fired generation can act as a substitute for coal-fired generation when gas prices are sufficiently low. The graph below shows that as natural gas prices approached $2/MMBtu and the cost advantage of coal faded, dispatch from natural gas-fired power plants rose roughly 50% from a year prior.

###ppresentation by the Brookings Institute
examining other studies, including those issued by the Department of Energy and Deloitte, suggests that the perceived negative economic effects of greater LNG exports may be exaggerated as the degree of domestic price increases caused by exports would be limited by market forces.

The Brookings Institute's study concluded that natural gas prices would rise rather modestly (the range of increases is from 2% to 11%) and this would not adversely affect large consumers from industry or power generation. The Brookings Institute also concluded that growth in the global LNG supply portfolio via North American involvement would be beneficial geopolitically as it would offer more choices to net importers and thus provide some security in case of disruptions from traditional exporters. The Energy Information Administration has projected in this year's Annual Energy Outlook that the US would become a net exporter of LNG in 2016. Reasons for the temporal lag lie in LNG terminals being capital-intensive multi-billion dollar projects laden with financial risk for prospective developers and the time-consuming process of obtaining government approval and export licences.

The development of North America's LNG export capacity may not be a detriment to North American economies. Rather, the development of the export capacity may indirectly be beneficial to those very economies by reinforcing the energy security of its trade partners who are net importers of the commodity.

High Natural Gas Production, Low Demand and Prices: The Interplay  Read more »

LNG Imports Grow in Time of Supply Surplus: Why?  Read more »