U.S. LNG Export

Implications: Do not expect USG LNG exports anytime soon. The LNG is not available from the US. The infrastructure is not available to make LNG in the US Gulf. The U.S. political winds would not permit energy exports in this market.

Analysis:

Do not expect much USG LNG export anytime soon.

Today's LNG prices make a compelling case theoretical case for Atlantic-Pacific Arbitrage. The Henry Hub forward curve through the upcoming winter, peaking at just short of US$ 10/mmbtu is at a minimum US$ 8 below European NBP and at least US$ 12 under spot Asian prices. As a result we are seeing Atlantic cargoes, mainly from Trinidad and West Africa, being diverted to China, Korea, and Japan in Q4 2008 through Q1 2009. And there have been at least two cargoes scheduled to load in Zeebrugge for Asian winter deliveries. Capacity holders in Zeebrugge receive contractual LNG supplies from Algeria and the Middle East priced against European market indices, and reshipment facilitates a means for the buyers to sidestep destination restrictions their suppliers' attach to their cargoes while capturing Asian upside pricing.

But re-exporting LNG from receiving terminal requires baseload LNG deliveries into the shore tanks which can be re-loaded back on to LNG tankers. And the simple truth is that the same low Henry Hub pricing that makes exporting economically viable makes it logistically impossible in today’s market, because no cargoes are coming to the US Gulf in the first place.

With minor modifications (reinstallation of check values, vapor balance management plans, etc.) many receiving terminals can physically reload cargoes onto LNG tankers for export. All it requires is LNG in the US Gulf receiving terminal’s tanks. And it is unlikely that LNG will be there for many months to come.

Some receiving terminals have looked at reliqifaction capability to liquify domestically produced natural to make LNG for export. The US Gulf LPG (propane and butane) terminals have played this game for years; these terminals import LPG from the Middle East in the summer and export to premium markets such as Asia in the winter. But there are two big differences between LPG and LNG. First, the capital cost to construct LPG liquefaction equipment is far greater than that for LPG, as is the energy cost of liquefaction. Second, the political fallout from exporting natural gas, considered a strategic energy source from an energy-starved US is likely to be an insurmountable obstacle for the foreseeable future.

So while Freeport, and other US Gulf receiving terminals may have the desire, actual exports may be a long time coming.