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.