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LNG Made in America
Europe Commits to U.S. Shale Gas

America is now exporting our glut of shale gas, and despite some shaky market conditions we’re finding European buyers keen on importing these new LNG supplies. The WSJ reports:

On a gross basis, [European imports of American LNG] don’t make much sense. One key European gas price, known as NBP, was Monday trading at about $4.25 per million British thermal units. Buyers of LNG must generally pay about 115% of the U.S. natural gas price, about $2.10 per million BTU. Then there is $2.5-$3.0 in tolling costs to the LNG plant and perhaps $2 in shipping, fuel and regasification costs. That implies a total cost toward $7, a clear loss.

But, argues one gas executive, U.S. shipments will still come. Buyers have committed to pay liquefaction facilities their tolling charge, making that a sunk cost. Shipping and regasification is generally booked and paid for in advance. The only real variable costs are U.S. gas prices and fuel costs, about $3 per million BTU.

The past 18 months or so have proven how difficult it is to predict the future of oil or natural gas markets. Crude was trading well above $100 per barrel in June of 2014, and today it struggles to stay above $31. Natural gas is different, in that it’s a less liquid commodity (no pun intended) and its contracts have historically been linked with oil prices. But as more and more LNG supplies come online around the world, buyers will have more supply options than they had in the past, when overland pipeline routes were there only option. As a result, natural gas will be increasingly sold based on spot prices, rather than oil price linkages, and likely won’t come with the decade long contracts that were once the norm.

Europe is an excellent example of this, as it looks to move away from long-term take-or-pay contracts with Russia’s Gazprom. European gas prices are cheap today, so much so that the price imperative for liquifying, shipping, and regassifying U.S. shale gas is looking like less of an attractive proposition than it once was. But many European buyers have already committed to paying that premium for a steady energy supply that doesn’t come with the kinds of strings Russia likes to attach.

And even if Europe doesn’t start guzzling U.S. LNG overnight, Moscow now knows that its leverage over Europe has been significantly weakened: if it chooses to cut off supplies (as it’s done to Ukraine twice in recent years) or jack up prices, well, the continent has another option just across the Atlantic.

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  • Andrew Allison

    For the option across the Atlantic to be viable, Europe needs to buy enough US NatGas to build and maintain the delivery infrastructure. The question is what sort of premium they are willing to pay in order to do so.

    • f1b0nacc1

      Of course unless the Russians are willing to sustain fire-sale prices (forgive the pun) indefinitely, the effect of a fracking ‘deterrent’ may produce the same effect as an actual infrastructure in place. After all, if the prices rise high enough to make a import infrastructure viable, then the Russians lose their leverage very quickly, perhaps beyond their ability to recover. If they keep the prices low (by sustaining high output and low prices) and avoid interruptions that might otherwise encourage the EUnicks to pay those premiums to sustain that infrastructure, then they lose both leverage and revenue….

      Win – win?

      • Andrew Allison

        My point was that absent the delivery infrastructure there is no deterrent and it would behoove the Europeans pay to get it into place.

        • f1b0nacc1

          I absolutely agree, but building that infrastructure is not hugely difficult, and can be implemented (relatively) quickly if the Russians either: 1) Push for higher gas prices (either through negotiation or production caps) which make fracked gas more competitive; or 2) Attempt to use gas supplies to ‘leverage’ European cooperation on any number of issues (sanctions, territorial adjustments, acquiescence to Russian adventurism, etc.) Either way, the infrastructure gets built (and it will over time anyway, Russians deals with China will eventually vacuum up their output and push the price up, however marginally) and the Russian leverage disappears. If the Russians ‘behave’ and don’t engage in (1) or (2), the effect is the same, their leverage is deterred through the principle of a ‘fleet in being’, in this case the potential for gas imports from the US.

          No doubt at all that much has to happen first, but the Russians have a very narrow road to walk that will grown narrower over time….

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