US LNG - coming soon to a place near you!
A stampede to export cheap US shale gas in the form of LNG will shake up gas markets around the world. In Europe, it will increase pressure on the big pipeline gas suppliers, Russia in particular, to re-think how they price their gas, or risk losing market share. The gas market will never be the same again.
Energy journalist Alex Forbes is on to it again. He reported for European Energy Review very early on the US shale gas revolution. Now he has dug into what we may call "the Sequel": the US LNG (liquefied natural gas) export stampede.
In an in-depth analysis written for EER, Alex takes stock of what he calls "the biggest U-turn in energy history". Not so long ago, the US was expected to become the world's largest importer of LNG. Now, thanks to the shale gas revolution, US energy companies are lining up to start exporting LNG to global markets.
Some of the infrastructure already exists: the now mostly-idle regasification terminals built in a burst of enthusiasm during the first half of the 2000s can be converted relatively cheaply into liquefaction facilities. The gas is there too: already 16 applications have been filed with the US Department of Energy for export licences. If all these projects came to fruition, an astonishing 245 billion cubic metres per year (Bcm/year) of gas, half of the total consumption in the EU, would become available to the market. This won't happen, but, as Alex's calculations show, the numbers will be large enough anyhow to shake up the global gas market: he concludes that the US is almost certainly on its way to becoming the number three LNG exporter after Qatar and Australia by the end of this decade.
There is one big "if": the US government will have to give the go-ahead for cheap US gas to be exported, which will not be an easy decision. Industry in the US would like to keep the competitive advantage of cheap gas over its international competitors. On the other hand, for the government to limit LNG exports would be seen world-wide as a betrayal in the American faith in free trade and free markets. A decision is not expected until next year.
The effects of large-scale US LNG exports would be profound in all the major gas-consuming regions of the world, including, of course, Europe.
Gas demand in Europe has been falling, partly because cheap coal is coming from the US, where power generators are switching from coal to even cheaper shale gas. So we have the irony that greenhouse gas emissions in the US are falling, despite its lack of climate policy, whereas in Europe, where climate policy is an obsession, greenhouse gas emissions are rising. LNG with a price linked to US hub prices would help to increase the attractiveness of gas in Europe, even allowing for the costs of liquefaction and transportation.
There are profound implications too for how pipeline gas is priced in Europe. LNG backed out of the US during the early years of the unconventional gas revolution did much to reduce the dominance of oil-indexed pricing in long-term contracts for gas from Russia, Algeria and Norway, especially in north-west Europe where trading hubs are becoming increasingly liquid. A flood of new LNG from gas produced in the US will hasten this transition, increasing the pressure on Europe's big pipeline gas suppliers to re-think how gas is priced, or face losing market share.
Come to think of it, isn't there a US geostrategic interest involved here as well? The US government has long been busy in the background supporting the construction of gas and oil pipelines from non-Russian suppliers in Central Asia and the Caucasus to Europe, for political reasons. Washington could now reach the same result by allowing LNG exports from the US. Wouldn’t that be much simpler?
If you are interested in the future of European energy markets, don't miss Alex's article.