Utilising its proprietary global gas model, Wood Mackenzie has carried out sensitivity analysis determining the outlook for LNG exports from the US. Wood Mackenzie shows that factors other than the impact of Russian action to protect market share, such as US gas prices (which are expected to rise), oil prices and coal prices, may be more influential, and will determine European spot prices through switching from coal to gas in the power sector.
The Research Director of Global Gas Supply for Wood Mackenzie, Stephen O’Rourke, said: “With European LNG imports, including from the US, set to grow over the next five years, there is much speculation about Russia’s likely response. Will Russia’s gas strategy mimic that of Saudi Arabia’s oil strategy, will it seek to retain market share in Europe, pushing European gas prices to levels that force the shut-in of US LNG exports?”
The analysis also shows that a significant volume of US LNG exports will be under threat over the course of the coming five years. Noel Tomnay, the Head of Global Gas & LNG research at Wood Mackenzie, said: “Our analysis shows that while Russia's export strategy is important, ultimately US LNG export utilisation will be influenced more by the price of other commodities: of US gas, oil and, particularly, of coal, which will determine European spot prices through coal-gas switching in the power sector.”
O’Rourke added: “Using our global gas model, we explored the impact of three determinants on US LNG exports: Russia’s gas export strategy; oil price; and coal price. This addressed questions such as: what if coal prices remain low; what if oil prices don’t rebound; what if Gazprom increases or decreases exports?”
Explaining the findings of the sensitivities, O’Rourke said: “Should oil prices remain low, Russian oil-indexed contract gas will remain cheap and buyers will maximise their offtake of Russian gas. At low oil prices, customer choice rather than strategic Russian decision making would allow Russia to retain over 30% of the circa 490 billion m3 European market and threaten US LNG export volumes. If coal prices also remain low, monthly European gas prices could fall to US$3.85/million Btu, and utilisation of US LNG export capacity could average 85% between 2017 and 2020.”
Regarding the question of what would happen if the price of oil was to rise, O’Rourke said: “Russia’s share of the European market stands to decline to only 25% if the price of oil and Russian contract gas rise. Russia could elect to make more pipe gas available at spot prices and increase market share to as much as 35%, but, in so doing, European spot prices could fall towards US$3/million Btu for longer periods.
“In addition to undermining existing contractual supply agreements, securing additional pipeline access for export volumes would require the tacit support of Ukraine and the EU, a dependence that appears politically challenging.”
Observing the findings of the sensitivities, Tomnay said: “Russia's export strategy will be a key determinant of US LNG export capacity utilisation, but the Russian pursuit of European market share to drive out US LNG from Europe seems either uneconomic and/or impractical under different external conditions. Instead other factors such as the price of US gas, oil and European coal prices will likely be greater determinants of US LNG export capacity utilisation. Subject to these factors alone, average utilisation of US LNG export capacity between 2017 and 2020 could vary from 54% to 100%. For US LNG exporters, the best thing to happen would be for global coal prices to rise, or for US gas prices to stay low.”
Edited from press release by David Rowlands
Read the article online at: https://www.lngindustry.com/liquefaction/09032016/wood-mackenzie-says-up-to-50-of-us-lng-is-at-risk-of-shut-in-over-the-next-five-years-2101/