DULLES, Va.--()--When the fear and hype die down, U.S. exports of liquefied natural gas (LNG) will happen, and volumes will be smaller than many expect with a modest impact on domestic gas markets, according to a global gas market expert. But just a little bit can make a difference in other ways.
“And I think that's going to put tremendous pressure on all these oil-indexed paradigms that you see beginning to crumble in Europe. But particularly in Asia I think you'll begin to see that begin to crumble.”
Ken Medlock, a Baker Institute energy fellow at Rice University in Houston, said the United States will be "lucky to see more than 1 Bcf/d" of exports 10 years from now. "I don't think it's going to be a huge number," he told Natural Gas Intelligence (NGI).
"Here's the deal, though, and this is what I think is the most important thing from a policy perspective and everything else: when you have that artery open so there's this opportunity, all you really need is just the threat of arbitrage to begin to see markets blink."
Linking U.S. gas markets with the world will cause Asian and European market players to take gas storage positions in the United States "because what you have when you have both import and export capability in the U.S. is a direct link to all the storage we have in this country," Medlock said. "Once that begins to happen, it creates not only spatial arbitrage opportunities, but intertemporal [opportunities]. So you can trade basically based on seasonal price movements. And that will inject a lot of liquidity into the global market.
"And I think that's going to put tremendous pressure on all these oil-indexed paradigms that you see beginning to crumble in Europe. But particularly in Asia I think you'll begin to see that begin to crumble."
Even if North America becomes a sort of gas storage lung, inhaling and exhaling with the seasons, don't look for long-held global LNG trading practices to crumble soon. That will take at least a decade, Medlock said. "It's not going to happen fast." One of the important things that has to happen in the Asian market is development of a continental pipeline system, particularly in China, Medlock told NGI.
He believes global arbitrage players will be active in the export market, noting that Asians and Europeans can hold U.S. storage capacity anywhere in the country and make their market strategies work through displacement.
"If I'm Tepco [Tokyo Electric Power Co.], I can take a storage position at Leidy [Hub] and actually use that seasonal movement to hedge some of the risk that I see associated with seasonal price movements to cargoes I actually receive," he said. "But you still need that physical capability to link to that market, and that's what opening exports up will do."
Geopolitically that has "tremendous implications" because of all of the LNG currently imported into Asia at oil-indexed prices, Medlock said. Middle Eastern countries, in particular, have benefited from the emergence of the Asian gas market. "What this does is it puts pressure on that revenue stream, and it does change the dynamic in terms of how those countries approach various things in the foreign policy arena," Medlock said.
"There are definite geopolitical benefits that accrue to the United States as a result of all this stuff. If we begin to export, you could potentially further those sorts of things."
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Intelligence Press Inc., is an independent publishing company serving the energy industry since 1981 with real-time news and price survey reports for the natural gas market in its publications: Natural Gas Intelligence, Daily Gas Price Index, Weekly Gas Price Index. Its new publication, NGI's Shale Daily at http://shaledaily.com/ is the first daily publication devoted exclusively to the unfolding shale revolution that is rewriting the energy outlook in North America.