International Markets Prove Hard To Conquer For U.S. LNG

May 2016, Vol. 243, No. 5

The latest drilling productivity report from the Energy Information Administration (EIA) has shown that the Marcellus shale continues to be the largest source of natural gas in the U.S. by a wide margin, with daily amounts that put it on par with leading international producers such as Iran and Qatar. This is despite a serious dip in production that began last year as the market became saturated and prices plunged.

The domestic gas market is still saturated, according to the EIA, which has projected that gas output in the Marcellus and elsewhere will continue to decline. International markets are the natural alternative for shale gas producers, but there are a few issues with this alternative, and these issues mean that the huge output in the Marcellus is not such good news.

First, there is the competition. The European market is an attractive destination for U.S. gas as it is looking to diversify away from Russia’s Gazprom. Asia, with its high levels of demand, is also an attractive prospect. However, there are suppliers with an established presence in both these markets, which are likely to cut prices in a bid to preserve their market share. U.S. exporters, on the other hand, have less space for maneuvering.

The only way U.S. companies can transport their gas is after liquefying it and shipping it to Europe or Asia. Cheniere Energy is already doing this. There are several liquefaction terminals in construction across the country, driven by hopes for gas demand growth across the world. However, these hopes have not yet proved realistic. To complicate things further, pipeline projects at home are being delayed, adding to the pressure on gas producers.

There is a glut on the international gas market comparable to that in oil, although various sources claim the oil glut is on the wane with the recent production outages in Canada and Nigeria.

Last month, Barclays’ Commodity Research unit issued a note, in which its analyst team said: “Given limited amounts of incremental demand in the premium markets of Asia, the Middle East and South America, increasing volumes of LNG will likely be imported into Europe, especially northwest Europe, given the region’s liquidity relative to other global gas markets (the UK, Belgium, the Netherlands).” The analysts went on to add: “However, the LNG glut will converge on Europe, meaning Europe’s prices will likely decline.”

If European gas prices drop any further, U.S. gas will be unable to compete with current suppliers, which use an extensive pipeline system to feed gas into Europe at lower than LNG shipping rates. Maybe the best solution to the glut is the most obvious one: cut production, let the market rebalance, and try to survive in the meantime.

By Irina Slav of

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