Gas glut benefits US economy but will LNG exports push up prices?

RELATED QUOTES

SymbolPriceChange
LNG54.28-0.43
GS154.92+0.18

The US could become a net gas exporter by 2022, according to the Energy Information Administration but is this a sensible move?

The glut of gas in the US has benefited the American economy at a time of economic crisis, giving industry access to cheap energy. Manufacturers have not been able to compete in the global market on labour costs or taxation but subdued power costs have made them more competitive and the US economy has been performing better than anyone could have expected.

However, building liquefied natural gas (LNG) terminals and exporting energy to places where prices are higher such as Asia will ultimately increase prices in the US. This will mean industry loses some of its competitive edge.

“What effect LNG exports will have on US prices is the central question holding up the federal regulatory approval process,” Teri Viswanath, a natural gas commodity strategist at BHP Paribas, said. The Department of Energy (DoE) is required to give permits to export natural gas.

So far, the DoE has only licensed one US business to export LNG to the rest of the world Cheniere Energy (AMEX: LNG - news) . The company has federal permission to export LNG from a terminal at Sabine Pass in Louisiana. There are about 15 other export permits awaiting approval.

“In the relatively unlikely event that all proposed export terminals are developed, US LNG exports would sky-rocket to 43pc of current production and almost certainly put upwards pressure on domestic prices,” Ms Viswanath noted.

However, most observers think that the current low price of gas in the country is unsustainable anyway - and prices will rise even if no export permits are granted.

As natural gas prices have plunged, producers have simply stopped pumping gas and explorers have stopped looking for new resources. This will ultimately crimp supply and cause prices to rise when the recovery really kicks in.

Indeed, US gas prices have already doubled from their exceptional nadir earlier this year.

Prices at the Henry Hub in Louisiana fell to a decade low of $1.85 per million British thermal units (mBTUs) in April, but have since recovered to around $3.60. Prices have gained now for three consecutive quarters and prices are likely to stay at around this level or move higher over the next few years, as US power stations switch to gas from coal.

Last week, Moody’s lifted its assumptions for the North American

Henry Hub benchmark spot price by $0.50, to $3.50 per million mBTU in 2013 and to $4.00 in 2014 and thereafter.

“North American natural gas prices had sagged in recent years as a shale and hydraulic fracturing boom and mild weather led to a significant oversupply, but prices have climbed in 2012 on coal-to-gas switching and hot weather, and as companies have scaled back their dry gas drilling activity,” Moody’s said.

Goldman Sachs (NYSE: GS - news) sees the US price hitting $4.25 sometime during 2013. The chance of rises to $5 to $6 in the next few years remains high.

“Amidst the ongoing debate, a recent Baker Institute paper suggests that the 'hand-wringing’ about domestic price impacts is unnecessary as the international market response will ultimately limit US LNG exports,” Ms Viswanath adds.

“Indeed it is possible the current hold-up of federal approvals might delay the development of US export capacity until such time that other sources of global supply become available, thereby limiting the call on US supplies.”

Ms Viswnath thinks that all this will mean just 2bn to 4bn cubic feet a day of gas will be exported, so the scare stories over how much exports will cause US gas prices to rise are over egged.

So it looks like US regulators need to stop worrying. Preventing the export of gas isn’t going to stop US prices rising, but exports could improve the country’s balance of payments. GW