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North American LNG Export Dream Evaporating

North American LNG Export Dream Evaporating

The rush to export natural gas from North America was nice while it lasted.

But the spot prices for liquefied natural gas (LNG) in Asia have collapsed, leaving a shrinking opportunity on the table for the plethora of export proposals. Much of that has to do with oil prices falling by half over the past year because LNG prices are linked to the price of oil in much of the world. The latest data from Platts shows that the Japan/Korea Marker (JKM) – the benchmark for LNG in northeast Asia – fell to just $7.279 per million Btu (MMBtu) for April delivery, or nearly 60 percent lower than they were at this time in 2014. Related: How Much Longer Can OPEC Hold Out?

That has erased the enormous gulf between natural gas prices in North America and their counterpart in Asia. Without a wide price disparity, the opportunity to “arbitrage” natural gas by selling it at higher prices to Japan, Korea, and China is evaporating.

A new report from Moody’s predicts that most of the 50-plus proposed LNG export terminals in Canada and the United States will be cancelled. “The drop in international oil prices relative to US natural gas prices has wiped out the price advantage US LNG projects, reversing the wide differentials of the past four years that led Asian buyers to demand more Henry Hub-linked contracts for their LNG portfolios," Moody's Senior Vice President Mihoko Manabe concluded in the report. Related: The Real Cost Of Cheap Oil

That won’t stop a global glut in liquefaction capacity as some of the projects already under construction around the world near completion. The problem is that while each individual project makes sense to complete if it is already underway, collectively they are running head on into a buzz saw.

Global liquefaction supply is set to expand by about one-third between 2014 and 2018. Much of that will take place in Australia, which accounts for more than half of the world’s LNG capacity under construction. The vast new supplies coming online at a time when prices are already subdued will kill off new LNG construction for years to come. Related: EIA Changes Tack On Latest Oil Crisis

Fortunately for developers in North America, the vast majority of the projects on the drawing board have not received final investment decisions. That will limit the losses when they are ultimately scrapped. Cheniere Energy’s Sabine Pass is already under construction, and its Corpus Christi project may move forward as well. Other brownfield sites could also proceed, owing to their lower costs. But new greenfield projects in North America are as good as dead.

By Charles Kennedy for Oilprice.com

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