The response of Asian and global markets to US liquefied natural gas exports will be much stronger and will happen much sooner than many anticipate, putting strong downward pressure on Asian prices, Rice University fellow Kenneth Medlock said Tuesday.
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Speaking on a BNP Paribas Commodity Markets conference call on the role of shale gas in the US energy transformation, Medlock said the margin for LNG export profitability is "razor thin" and that prices abroad, particularly in Asia, the primary market for exports, will "soften dramatically.
The global market will likely be able to absorb only 3 Bcf/d-4 Bcf/d of LNG from the US, a maximum 12 Bcf/d by 2020 and way below 20 Bcf/d of exports predicted in some studies, he said.
"When trade between two markets is introduced, price in each adjusts," Medlock said.
The adjustments will depend on the relative elasticities of supply and demand, or how strongly they will affect each other, which became much more pronounced due to shale gas development, he said.
The US Department of Energy has more than 20 applications pending for projects to export some 30 Bcf/d to countries with which the US has free trade agreements and another 28.54 Bcf/d for exports to non-FTA countries.
The impact of LNG exports on US domestic prices would not be as strong as many predict due to shale gas development, which makes both supply and demand much more responsive to any price changes, Medlock said.
For example, 2011-2020 US gas prices could have been as high as $6.03/MMBtu without shale development, yet shale made it drop to an average of $4.18/MMBtu, he said. For 2031-2040, the price could have been at $8.24/MMBtu, but due to shale it is only forecast to average $5.46/MMBtu, he added.
"Expansion of shale gas in the US, and later in Europe and Asia, makes the global gas supply curve more elastic," Medlock said. "This mitigates the potential for sustained long-term increases in price."
Therefore, margins for US exports are thin and will depend on how rapidly projects come online. Previously, LNG exports dealt with lots of capacity constraint and insufficient supply. That is why LNG trade was down in 2012. Yet, as capacity constraint disappears, the global gas prices will likely drop fast, he said.