Crude’s biggest premium to natural gas is boosting the allure of shipping gas from North America to international buyers saddled with a 40-year-old system that links the fuel to the cost of oil.
The ratio of Brent crude to natural gas was about 27-to-1 today, based on oil futures prices on the ICE Futures Europe exchange in London and gas on the New York Mercantile Exchange. It touched a record of more than 31-to-1 on April 8. The average during the past decade is about 10-to-1.
The growing price difference is encouraging U.S. companies to build LNG export plants, betting they can find buyers in nations such as Korea and Japan, where contracts have been pegged to crude since the 1970s for lack of an international benchmark price. Apache Corp. and Cheniere Energy Inc. are among companies planning to build nine terminals to export LNG from North America starting in 2015.
“The stage is set for a major struggle,” said Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG shipments. “If the U.S. joined as an exporter of LNG, that will greatly change the markets, especially if future contracts were global.”
The Brent-gas ratio widened this year as oil climbed 19 percent amid political turmoil in the Middle East, while U.S. natural gas prices fell 5.1 percent amid rising production from shale deposits. The U.S. has enough gas reserves to last more than 100 years at current rates of demand, according to the Energy Department in Washington.
No Immediate Threat
Brent crude for June settlement dropped $5.06, or 4.3 percent, to $112.57 a barrel on the ICE. Natural gas for June delivery declined 6.5 cents, or 1.5 percent, to $4.181 per million British thermal units.
U.S. LNG exports aren’t likely to pose an immediate threat to the oil-linked pricing system because importers such as Japan are willing to pay higher prices to lock in long-term supplies, according to Allen.
While there have been calls from buyers from countries including Japan and Germany to end the linkage with crude, the March 11 earthquake and tsunami that damaged Japanese nuclear power plants increased the need to secure gas supplies for electricity generation, reducing the likelihood of delinking from oil, Allen said.
“Long-term buyers will feel more urgency to secure supply in what is now perceived to be an incrementally tighter market and may be more willing to pay a higher price,” Barclays Capitals analysts including Michael Zenker said in a report on April 12.
Purchases of LNG by Japan and Korea, the world’s biggest importers of the fuel, are based on a formula that includes what is known as the Japan Crude Cocktail, an average of prices the nation pays for oil imports provided monthly by the Finance Ministry, according to James Jensen, president of Weston, Massachusetts-based Jensen Associates.
In January, when the cocktail price averaged $91.83 a barrel, LNG Japan Corp., an energy-trading company, paid an average of $12.84 per million Btu for cargoes from Qatar. Natural gas in New York that month averaged $4.498.
At $4 per million Btu, it would cost $9.15 to deliver U.S. gas cargoes to Japan, when taking liquefaction and transportation costs into account, according to Barclays. Delivery to Europe would cost $7.15 because of the shorter voyage, the bank said in the report. European importers currently pay about $10 per million Btu.
U.S. gas may average $5.25 per million Btu in 2015 as Brent oil advances to $135 a barrel, a ratio of about 26-to-1, according to Barclays. At that price, North American LNG would be competitive, it said.
“We can compete globally, probably not with Qatar but with some of the other liquefaction facilities that are coming on line over the next several years in countries such as Australia,” said Cameron Horwitz, an analyst in Houston at Canaccord Genuity.
Houston-based Cheniere has booked eight clients for a proposed terminal at Sabine Pass in Louisiana, according to Chief Executive Officer Charif Souki.
“There is already enormous demand for LNG,” Souki said in a telephone interview. Cheniere, which aims to start exports in 2015, has signed contracts with clients in Asia and Europe for 10 million metric tons a year, he said.
The U.S. Energy Department last year approved Sabine Pass to export LNG to countries with U.S. free trade agreements. Application to ship LNG to countries without trade agreements is pending. Cheniere has support from local and federal governments, Souki said.
Kitimat LNG, a joint venture of Apache Corp. and EOG Resources Inc., both based in Houston, and Encana Corp., in Calgary, Alberta, plan to build an export terminal in British Columbia that would start operations in 2015. Macquarie Energy Markets, a unit of Sydney-based Macquarie Group Ltd., is working with Freeport LNG to build an export terminal at Freeport, Texas, tapping into shale gas reserves.
U.S. shale gas production grew by an average of 48 percent a year from 2006 to 2010, according to the Energy Department in Washington. Output will grow almost threefold from 2009 to 2035, the department predicted in its Annual Energy Outlook release on April 26.
The U.S. is already re-exporting LNG cargoes. Banks such as Citigroup Inc. and companies including ConocoPhillips last year shipped a record 12 previously imported cargoes to countries including Japan, South Korea, Spain and the U.K., according to the Energy Department. Five cargoes were transported in the first two months of this year, department data show.