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LNG, Mexico exports raising price risks for US gas producers, BP executive warns

Growth in exports of natural gas has added new risks for U.S. producers as the domestic fundamentals that once formed the basis of pricing are starting to be displaced by global market factors, according to BP PLC executive Jared Barton.

U.S. gas producers, who once faced investor pressure to grow their output, are now facing Wall Street demands to improve returns, a turn of events that has changed the way capital is allocated and even brought about some executive resignations, Barton, vice president of marketing and origination at BP Energy Co. Inc., said Aug. 6 at an industry conference. Price weakness in export markets and slower growth among the U.S. chemical and power generation gas users have given some producers reason to rethink their expansion plans.

"Producers are retooling their shops, trying to work through their long-term production outlooks and plans with their associated capital spends," Barton said Aug. 6 at the LDC Gas Forums Rockies & West gathering in Los Angeles. "Deliverability and infrastructure issues continue to be a problem in certain parts of the globe, certain parts of Mexico and certain parts of the U.S."

U.S. natural gas was once a "continental commodity," Barton said, but export opportunities such as LNG and pipelines to Mexico have raised risks for producers.

"Historically, U.S. basins have been subject to U.S. supply-demand fundamentals. In recent years, our participation in Mexico and through pipeline exports via pipe have created an element of risk," Barton said. "Add on top of that global LNG exports with the associated demand in Europe and Asia and ... global competition in that space with Qatar and Australia in that space, and you see a huge amount of price risk and volatility for U.S. markets."

Four North American LNG projects at or near investment approval for startup around 2023 could further strain global markets that are already oversupplied. Those four projects would add incremental liquefaction capacity of about 5 Bcf/d, boosting total export liquefaction capacity to 15 Bcf/d.

"In recent months, LNG exports are just at or just in the money. We have seen a dip just below the money at times," Barton said. "The U.S. will be long in the near-term LNG but not necessarily forever."

Barton told the audience of mostly western U.S.-based gas producers and buyers that net gas-fired power generation, which is on the rise in much of the nation, is falling in the region. California, the largest western gas market, has turned to renewables to replace traditional electricity sources and reduced its plans for gas power.

"Net gas capacity in the West is falling," Barton said. "California is the largest demand center in the West, and with its associated mandates and renewable portfolio standards, they're having an effect on what the wedge of gas looks like."