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Natural gas price margins and U.S. legislation are just two of the risks faced by companies working on exporting domestically produced LNG.
Currently favorable margins for U.S. liquefied natural gas (LNG) exports may not be sustainable and could set up long-term risks for these infrastructure projects, according to Fitch Ratings.
Contracts could be used to spread the risks to different portions of the industry. “For example, on Jan. 26, Cheniere announced it had reached a sale and purchase agreement with BG Gulf Coast stipulating that, in the event the facility is idled, BG will continue to pay an amount likely to satisfy debt charges and other costs. Terminals lacking similar sales contracts that are exposed to merchant-market-price risk are unlikely to attract viable debt financing,” Fitch warned.
“The combination of shale gas reserves and weak economy has pushed prices to a level approaching the marginal cost of production. We expect the recent low prices for natural gas to continue, as supply should remain high. The U.S. Energy Information Administration projects shale gas production to increase from 5.0 trillion cubic feet (Tcf) in 2010 to 13.6 Tcf in 2035,” Fitch stated.
Even with that caveat, Fitch regarded the measured conversion of some U.S. LNG terminals to allow the export of liquid natural gas as positive.
“We also expect the Department of Energy to continue to grant licenses to construct or reconfigure LNG terminal facilities to increase the volume of exportable resources. However, several risks have been identified in this scenario that could disrupt this expansion and the securities funding them,” the ratings company noted.
Given that shale gas plays a key role in most natural gas pricing projections, which in turn impacts LNG prices, hydraulic fracturing takes center stage in opening up the supply of natural gas to the liquefaction plants.
“The immediate future is uncertain as the short- and long-term potential environmental impacts are examined. We also see the potential for exploitation of shale gas reserves in many other countries. Some have significant advantages over U.S. distributors,” Fitch continued.
Worldwide, Japan and South Korea remain the largest importers of LNG. At the same time, China expects to tap into vast shale gas deposits in the coming years.
“Should discoveries of unconventional natural gas flourish there, the combination of low, labor costs and small shipping cost due to the proximity of these countries could lessen the traffic at U.S. marine terminals constructed to export natural gas,” Fitch explained.
There are several political challenges, including legislation introduced on Feb. 14 by U.S. Rep. Ed Markey (D-MA). He introduced two bills in the House of Representatives aimed at stopping LNG exports.
The Republican-controlled House will likely oppose Markey’s legislation in the face of current excess natural gas supply that is causing some companies to curtail drilling plans.
Even with the bills filed on Valentine’s Day, there is no love lost between Markey and the oil and gas industry. He is highly critical of the petroleum industry.
The first bill he introduced would stop the Federal Energy Regulatory Commission from approving any LNG export facilities until 2025. The second bill would not allow exports of any domestic gas drilled on federal lands and would ban any pipelines that cross federal lands from delivering natural gas to the liquefaction plants. This would mean that no natural gas from federal waters offshore could be exported.
“Low natural gas prices are a competitive advantage for American businesses and a relief for American families,” Markey said. “Exporting our natural gas would eliminate our economic edge and impose new costs on consumers.”
So far, the only LNG exports that have received Department of Energy approval would be to the 15 countries that have free trade agreements with the U.S.
Contact the author, Scott Weeden, at firstname.lastname@example.org.