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Why Cheap Oil Is Bad News for U.S. Gas-Export Hopes

Plentiful supplies of crude, fueled in part by the U.S. boom, undermine the case for shipping liquefied natural gas overseas.

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For the past year, many in the United States have been rubbing their hands at the prospect of a huge natural-gas export boom, raising hopes of a flood of cheap and clean fuel being shipped to friends in Europe and Asia. But the long-awaited gas boom has yet to materialize — and with oil prices well below last year’s highs, it might never.

At the peak of enthusiasm over U.S. gas exports, more than 30 proposed projects jumped on the bandwagon, with grandiose visions of dispatching tankers full of liquefied natural gas (LNG) from the East Coast, the Gulf Coast, and the Pacific Coast to thirsty markets all around the world. Leading U.S. politicians, from President Barack Obama to House Speaker John Boehner, R-Ohio, all have touted the prospects of Washington turning its energy wealth into geopolitical coin, especially now that Europe is redoubling efforts to reduce its energy dependence on Russia. Energy Secretary Ernest Moniz still speaks of the United States surpassing Qatar as the No. 1 LNG exporter this decade.

Today, though, only five U.S. LNG export projects have gotten government approval and are under construction. Only one, Cheniere Energy’s first-out-of-the-gate facility at Sabine Pass, Louisiana, is on track to export any gas this year. In a sign of how cloudy the horizon has suddenly gotten, Cheniere has yet to make a final investment decision on an expansion of Sabine Pass — a tricky, multibillion dollar decision against oil prices that are still almost 50 percent lower than they were last summer. Moody’s Investors Service, a ratings agency, warned last month that cheap oil could well kneecap U.S. and Canadian LNG export projects still in the queue.

“The market controls the molecules for U.S. LNG projects — always has and always will,” said Kevin Book, managing director of ClearView Energy Partners, an energy consultancy. “In Washington, they can talk all they want about powering the world, but it’s all got to work on paper.”

And there might lie the rub: Oil prices are calling into question the economics of U.S. projects. In many markets, especially Asia, natural-gas prices are pegged to the price of oil. When crude cost more than $100 a barrel last year, liquefied natural gas in Asia fetched a fortune. Today, with oil hovering around $60 or $70 a barrel, LNG prices in Asia have plummeted as well.

That means that, right now, the economics behind U.S. gas exports simply aren’t appealing: The price the gas would fetch in Asia is lower than the cost of the gas in the United States, plus the cost to liquefy it and ship it halfway around the world. Europe, another potential market that is increasingly looking to diversify away from fickle Russian gas supplies, won’t ride to the rescue, either; gas prices are even lower there.

The horizon is a bit bleak in part because there is a lot of supply chasing a little bit of demand. Globally, the world will add almost 20 billion cubic feet a day of LNG capacity by the end of the decade, while it will consume only about 16 billion cubic feet a day more. In other words, even though U.S. companies are building a lot of export capacity — more than 9 billion cubic feet of potential gas exports per day — only a fraction of it may actually be used.

But the United States does have one big advantage compared with other hopeful exporters, including Canada, Australia, and countries in East Africa: cheap gas. That will underpin the projects already on the drawing board and ensure a big role for U.S. exporters.

“Nobody expected that all 30-odd projects would ever be built,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. The recent wobble due to cheap oil “doesn’t change the fact that U.S. LNG exports could be a very big deal,” he said. And an abundance of cheap gas could help ensure that U.S. projects, at least, survive any bloodletting from a world awash in cheap oil, pushing the pain onto hopeful gas exporters in Canada, Australia, and East Africa.

The U.S. export boom was supposed to be a no-brainer, underwritten by America’s own energy revolution, which has unlocked that gusher of cheap natural gas thanks to hydraulic fracturing, or fracking. For years, lawmakers have tried (and are still trying) to prod the U.S. government into quicker approval of LNG export projects to turn that domestic gusher into a global bonanza.

But if the U.S. export boom now looks so vulnerable, that’s because of the second, and less noticed, American gas revolution: a fundamental change in the way that LNG is traded.

Traditionally, LNG deals were long-term contracts at stable prices between a seller and a buyer, functioning essentially like a natural-gas pipeline with massive tankers taking the place of miles of steel pipeline. The bulk of U.S. gas export deals, in contrast, don’t have a fixed destination or a fixed price. Rather, buyers snatch up natural gas at current U.S. market prices (traded at Henry Hub, the clearinghouse for U.S. natural gas), liquefy it, and then ship it wherever in the world will fetch the best price. But if there’s nobody willing to pay enough to cover the costs, much of that gas won’t get shipped.

“Without higher crude prices, the economic case for Henry Hub-linked exports is currently on the back burner,” Book said.

How much could oil prices affect America’s gas-export dreams? The Energy Information Administration (EIA), an arm of the Department of Energy, has a few wide-ranging scenarios. In the reference case, with more or less normal oil prices for the next two decades, U.S. LNG exports max out at about 9.3 billion cubic feet a day by 2030. All the export capacity currently under construction, in other words, would suffice for the next quarter century.

If oil prices spike to crazy heights of $250 a barrel by 2040, EIA says, then U.S. gas exporters will have a field day, and exports could explode to more than 20 billion cubic feet a day. (Of course, if oil is insanely expensive, the U.S. will face competition from gas exporters in Africa and Australia.)

On the other hand, America’s own crude-production boom could end up killing the gas-export bonanza it was supposed to spawn. If oil prices languish in the $70 dollar range for decades to come, thanks to plentiful oil from the United States and other places, then LNG exports would never amount to more than a trickle, or about 2 billion cubic feet per day, EIA says.

Photo credit: Think Defence/Flickr

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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