Shale Set To Pummel Another Market



Eagle Ford & Energy

Shale set to pummel another market

Supply of LNG a game-changer

By Anna Shiryaevskaya and Isis Almeida, Bloomberg News   May 22, 2015

The U.S. is about to change the global LNG market forever.

When the first tanker carrying liquefied natural gas from shale fields leaves the Sabine Pass terminal in Louisiana in December, it will turn consumers into traders with more bargaining power. That will transform a market dominated by long-term contracts into one where spot trading gains prominence, similar to crude oil.

Since the first LNG cargo went to the U.K. from Algeria under a long-term contract in 1964, buyers opted for guaranteed supply because the fuel was scarce. That’s changing because gas from the Eagle Ford and other fields will transform the U.S. into the third-biggest exporter by 2020. Spot trading probably will account for almost half of transactions by then, from 29 percent last year.

Overall LNG trade will exceed $120 billion this year, overtaking iron ore as the second-most valuable commodity after oil, Goldman Sachs Group Inc. said in a March report. LNG is gas cooled to minus 256 degrees Fahrenheit so it occupies 600 times less space.

“We see the U.S. as a major contributor to the development of the LNG spot market as the volumes start to ramp up,” Jamie Buckland, head of investor relations at GasLog Ltd. in London, which owns 22 LNG tankers, wrote in an email. “There should be a lot more flexibility, and you could see some buyers of U.S. volumes selling product on to others.”

This month, the Energy Department gave Cheniere Energy Inc. final approval for the nation’s fifth major export terminal at Corpus Christi. Cheniere, which also operates Sabine Pass, expects the U.S. to produce 74 million metric tons of LNG by 2020. That’s about 22 percent of expected global output by 2019. Only Qatar and Australia will produce more.

The total LNG market will expand 40 percent by 2019, from 2013 levels, according to the International Energy Agency in Paris.

Significant U.S. exports likely will boost prices, currently about $3 a million British thermal units, Energy Aspects Ltd. said last week in a report for UniCredit SpA. U.S. gas may converge toward European levels, now at about $7 a million Btu, the analysts said.

Suppliers now are signing deals as short as two or three years rather than 20 years, according to Charif Souki, Cheniere’s chief executive officer.

Spot and short-term LNG trades are defined by the International Group of LNG Importers in Paris as deals lasting four years or less. They accounted for 16 percent of all transactions in 2006 and that share may expand to 45 percent by 2020, according to Alan Whitefield, a senior associate at Sund Energy AS, a consultant to the industry.

“What will make it a more interesting market is when gas starts being exported from the U.S., because then it becomes really like a commodity market,” said Marco Dunand, the CEO of Mercuria Energy Group Ltd. “If you have constant supply coming from a terminal, then it becomes a liquid commodity.”

U.S. natural gas also will play an important role in connecting Pacific and Atlantic markets, said Shigeru Muraki, an adviser at Tokyo Gas. The company is expanding its investment in shale gas production in the U.S. as a natural hedge for LNG, he said.

“We as a trading organization make our living from margins, so it both opens up opportunities and ties the different producing regions closer together,” said Ann-Elisabeth Serck-Hanssen, acting senior vice president of marketing and trading at Statoil ASA in Stavanger, Norway. “If you believe a good market is a liquid market, this is positive.”