In the early to mid 2000s, the US was seen as a key market for LNG imports and ranked as the fourth largest global LNG importer. However, technological advancements have led to a significant increase in shale gas discoveries in the US. Shale gas is similar to Coal Seam Gas in Australia but are extracted from different types of rock formations. It has been a remarkable turn of events for the US energy market with shale gas displacing LNG imports and the US now looking to export shale gas via LNG.
There are a number of reasons why exporting shale gas will be beneficial for the US:
- Existing infrastructure: A number of large-scale LNG import terminals were built during the last decade to receive LNG. However the rise of shale gas has left these assets under-utilised. These terminals can be converted into export facilities and will give the US a significant cost advantage as they are 40% cheaper to build than greenfield projects.
- Higher global gas prices: The US domestic gas price, referred to as Henry Hub, trades at $2.80/GJ compared to global LNG pricing which is linked to the oil price at roughly $13/GJ
However, there are number of impediments for the US to be a significant LNG exporter:
- Politics: US policy makers may not allow a significant export of energy given the high level of focus placed upon energy security within the US.
- Higher domestic gas prices: Exporting too much gas will result in higher domestic gas prices, removing the benefits of cheap energy for consumers
Impact on Australian LNG:
- LNG pricing: The LNG pricing of the first US LNG project commissioned was linked at Henry Hub rates, which is a significant discount to Australian LNG projects that are linked to the oil price and threatens to break this attractive linkage. However, it appears Australian projects are to remain linked to the oil price with traditional Asian buyers of Australian LNG focused on security of supply and it is in their interests for projects to be economically viable.
- Project economics: The large amount of LNG projects under construction in Australia is resulting in capex blowouts for a number of projects reducing project returns. The economics of greenfield projects are at risk as they are 40% more expensive to construct than brownfield projects.
Conclusion
The rise of shale gas as an energy source in the US has materially changed the outlook for LNG in the US. In the near term, we view the impact of US LNG exports as little risk to existing Austrlian LNG projects and pricing, given the LNG volumes sanctioned in the US are immaterial on a global LNG scale. The risk is the US policy makers willingness to export a larger amount of LNG, which has the capacity to disrupt market fundamentals.
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