RPT-COLUMN-US gas exports to Asia will narrow, not shut price gap: Kemp

Mon Sep 16, 2013 2:00am EDT
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By John Kemp

LONDON, Sept 13 (Reuters) - Large-scale gas exports from the United States will narrow the gap between U.S. domestic prices and those in Asia, but the boost to U.S. domestic gas prices is likely to be smaller than U.S. gas producers hope and consumers fear.

In October, gas importers in Japan and Korea will pay more than $15 per million British thermal units for shipments of liquefied natural gas (LNG), compared with under $10 for importers in Britain and less than $4 for importers in the United States, according to the U.S. Federal Energy Regulatory Commission.

No wonder gas producers and traders want to exploit the arbitrage, buying gas in the United States at prices linked to Henry Hub (currently under $4), liquefying it, and exporting it to customers in Japan, Korea, China and India at formula prices linked to the Japan Crude Cocktail (which currently values gas at more than $15).

For their part, Asian buyers want to break the oil link and purchase LNG at lower prices closer to Henry Hub. And domestic gas consumers in the United States fear that once exporting starts in earnest they could see the price they pay for natural gas double or more as American and Asian converge.

The problem with all these hopes and fears is that they fail to account properly for the enormous costs of running an LNG operation.

LNG prices in Asia are very unlikely to fall anywhere near to the level prevailing in the United States because exporters have to recover the enormous capital and operating costs of liquefying and transporting the gas.

Conversely, domestic U.S. gas prices will not rise anywhere close to those in Asia because the arbitrage window would close long before they approached that level.   Continued...