Ten years ago, the gas market in the US was on a veritable crusade to ramp up imports of gas – through both pipeline and LNG terminals. The situation today would be unrecognisable, with the US in recent months exporting gas even to regions such as the Middle East. It is highly probable that US exports will define the global gas market in the years to come. One way in which it will do this is by encouraging convergence of price signals between liquid European gas hubs and American gas hubs.
Over the last year, the majority of US LNG has mainly been going to Latin America. The chart above reflects this, showing numbers from CEDIGAZ on US LNG imports over 2016. This follows fundamental flow dynamics – Latin America is the destination of choice (all other else being equal) due to the short shipping distances which lowers costs. It would be misleading to use the chart above as a signal for times to come, however. This is because the US is exporting a relatively low level of LNG in total, something that is on trend to change later this year. The Middle Eastern market (mainly Egypt/Jordan) is highly competitive, and unlikely to have a higher price than North-West European hubs over the long term. Certainly, Middle Eastern imports will not make a higher proportion than Asian imports through 2017. If you look back historically, Asia tends to attract the most LNG. Yet, whilst it’s reasonable to assume that Asian LNG will make up the greatest proportion, it historically holding a premium over other regions, Europe here is the key signal for further US exports.
Europe has a significant demand for gas, and has too a significant amount of flexible LNG import capacity. LNG, at the right price, can displace coal power generation or even piped gas. An existing carbon price influences the point at which gas displaces coal (spark-dark spread), as any carbon price will increase the cost of generating power from coal much more than for gas. This has been particularly true in the UK, which has a higher carbon price, and is finding it comparatively easy to phase out coal power generation entirely. European gas/coal switching is the most significant factor in absorbing surplus LNG cargoes. It is logical to assume that, because of this, US export volumes are thus being priced based on European hub price signals.
As US gas exports grow, particularly with new Australian LNG going to Asia, Europe will absorb excess volumes. Note that Europe will not solve a supply glut, but only take excess volumes. This trend of Europe setting a price reference for US LNG will be sped up in summer this year if it coincides with lower demand as US LNG imports will have a stronger impact on the market.