The advent of horizontal drilling and hydraulic fracturing in the United States has fundamentally changed global energy economics. One of the most notable changes is that U.S. natural gas is now so cheap that it is marketable overseas, where prices are significantly higher. This disparity is what has driven a wave of applications with FERC and DOE to construct LNG export facilities in the U.S.
Since February, however, slower economic growth abroad and a warmer winter in key consumption areas have caused global demand for LNG to decline. Furthermore, supplies of LNG from the Middle East and Australia have increased. The combination has had a significant effect on global LNG prices.
The chart above presents the premium that countries around the globe have paid per Million British Thermal Units (MMBTU) over prices in Lake Charles, La., over the past four years. In other words, it represents the theoretical spread a LNG shipper might receive on gas purchased in Lake Charles and sold in various locations around the globe (excluding operating/shipping costs). As the spread grows, so does the profit incentive to construct a LNG export facility in the U.S.
As the chart above indicates, the spread, or differential, has dropped significantly this year in multiple markets around the world. LNG sold on the spot market in Japan in August earned only a $6.95/ MMBTU premium to its Lake Charles counterpart versus a $12.50 premium a year ago. With differentials this low, companies seeking to
secure long-term LNG export contracts for new facilities in the U.S. will find many projects uneconomical.
While we believe prices across the globe will rebound to some degree this winter, the economics of LNG export for the United States are changing, and likely not for the better. As a result, we would not be surprised to see several U.S. LNG projects currently in permitting at DOE and FERC canceled in 2015.