A study from Rice University’s James Baker Institute for Public Policy predicts LNG exports from the US may not be as large as anticipated.
The impact of liquid natural gas exports on domestic natural gas prices would likely not be impactful, according to a new study from Rice University’s James Baker Institute for Public Policy. The paper, authored by Kenneth Medlock, the institute’s Baker Fellow in Energy and Resource Economics, also predicts that the long-term volume of LNG exports would not likely be very large.
The study, “U.S. LNG Exports: Truth and Consequence,” concludes that the model that has been presented to policymakers is flawed because it assumes a certain volume of exports rather than recognizing that international market response will ultimately limit the amount of LNG exported.
“The question before policymakers is one of licensing a capability, not licensing a fixed volume,” Medlock said. “Therefore, this issue must be viewed in the context of international trade if informed policy decisions are to be made.”
As an example, Medlock points to the shutdown of all of Japan’s nuclear reactors in the wake of the Fukushima Daiichi disaster in 2011, causing LNG price indexes to jump markedly.
“The implication is that the price difference that currently exists in Asia and the rest of the world is at least partially the result of short-term constraints, or transitory factors, meaning they could not be expected to persist,” Medlock said.
“In fact, the pre-Fukushima pricing relationship ... can be expected to re-emerge as both new LNG delivery capacity is brought online, new sources of supply are developed and, in particular, if Japan’s nuclear reactors are restarted.”
Furthermore, the study argues that although LNG gas prices abroad are currently high, the next three decades are not projected to be profitable for US LNG exports. The study based this observation on growing competition in countries with new shale and pipeline developments, including China, Russia, Australia, and Argentina.
“If shale opportunities in Europe and Asia, and other sources of imported pipeline and LNG supply can be brought to market, then growth in global production will put downward pressure on prices everywhere,” Medlock said.
Medlock’s advice to policymakers: “The implication for policy is simple: Market responses will ultimately limit export volumes. The hand-wringing about domestic price impacts is based largely on an incomplete assessment of what should be addressed as an international trade question.”
Contact the author, Caroline Evans, at cevans@hartenergy.com.
