LNG Economics Shaken by Shale From US and LNG tankers through the Panama canal
Shale drillers in the U.S. are flooded with lot of natural gas over the past decade sending the prices to a 17-year low.
On the other hand due to widening of the Panama Canal, LNG shipping costs from the U.S. Gulf Coast to Japan which averaged about US$2.33 per 1,000 cubic feet nearly halved due to reduced transit time.
These two combination has given enough ammo for the LNG exporters in the U.S. to go global with the surplus and potentially upset markets from London to Tokyo.
- LNG became the world’s second most traded commodity and demand is anticipated to go up, Goldman said.
- U.S. gas is adding to the global glut triggered by new Australian supply.
- Demand for the product is waning in most Asian markets that were largely responsible for bringing about the initial surge of demand.
- Shale is having an outsized impact on how LNG is sold, prompting spot trading in lieu of long-term contracts.
“The U.S. clearly changed the picture,” Costanza Jacazio, a senior gas analyst with the Paris-based IEA, said in a phone interview. “It’s going basically from zero to the third-largest LNG capacity holder in the space of five years and it brings a new flexible dimension to the LNG market.”
Even so, the Panama Canal expansion may only have a limited effect on the economics for new LNG developments on Atlantic coastlines like the U.S. Gulf Coast. “The way the global market has changed the last couple of years, and all of the supply that’s coming on, its significance is going to be less than what was thought at the time,” says Robert Ineson, the managing director for North American natural gas at IHS Energy.
Despite lousy economic conditions in the medium term, LNG exports from the U.S. Gulf Coast will still see some benefit from the Panama Canal expansion in the near term. More than half of the new capacity coming online in the U.S. in the next three years is already contracted for buyers in Asia, according to analysis by Bloomberg New Energy Finance.
Australian and other foreign processors conclude long-term agreements to send gas to specific countries such as Japan and China. Asian buyers have contracted for more than half of the U.S. supply, but they have the freedom to ship the fuel to anywhere in the world, encouraging spot trading.
In emerging markets, smaller and cheaper floating import vessels have become popular.
“There are markets like Bangladesh and Pakistan where traditionally they would have gone with coal but now gas can be the cheaper option once you include the cost of new infrastructure,” Lelong of Goldman said. “You are seeing these energy poor countries often with poor credit ratings turning to LNG.”
Shale gas created intense competition between coal and gas in the U.S. and other parts of the world and suppliers will have much lower shipping costs compared to a few years ago.
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Ref.: Bloomberg, Financial Post
