Current obligation to lift any of the

Current
Scenario of LNG market in the U.S.

The United States is expected to
become one of the world’s top gas exporters by 2020, led by shale evolution
which fuels rapid growth in domestic production; leading to a fall in gas
prices and a drop in greenhouse gas emissions as power generation switches
from coal to gas, as well as reducing America’s historical reliance on
fossil fuel imports. According to IEA forecast the US would generate
almost 40% of the rise in global gas output between 2016 and 2022.
Graphical representation below   shows U.S. Lower 48 production of
natural gas by source, with shale gas accounting for a significantly
increasing proportion of total U.S. Lower 48 natural gas production. Shale
gas production is projected to account for over 60% of U.S. Lower 48
natural gas production by 2040.

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Source: EIA AEO 2017

 

General
U.S. LNG Contract Terms

U.S. LNG and liquefaction capacity in
case of tolling agreements are sold in majority under the long-term
twenty-year contracts (LNG & natural gas exporters around the world
typically require long-term offtake agreements and relatively inflexible
volumetric commitments from buyers to justify their upfront investments in
highly capital-intensive field development and gas infrastructure assets),
but buyers of U.S. LNG are not restricted by destination and offtake
volumes clauses.
The contract terms typically run about
115 percent of the price of U.S. natural gas (currently $2.81 per MMBtu,
Q4 2017) with an additional $3.00 per MMBtu for liquefaction fees. After
other charges for shipping, insurance and regasification are factored in,
the total cost of U.S. natural gas at LNG terminals in Europe is anywhere
from $7 to $8.
Depending on the contract type, off-takers
from U.S. terminals have to pay a fixed capacity charge or a tolling fee
of approximately $2.25 to $3.5 per MMBtu, which they are bound to regardless
of exported volumes, but are under no obligation to lift any of the
contracted LNG (or pay for it in full, including the cost of feed gas and
the natural gas used during the liquefaction process) if the economics of
exporting U.S. shale gas becomes disadvantageous on a variable cost basis.

 

U.S. LNG export value
chain

Exploration & Production

Liquefaction

Shipping

Regasification & Storage

 
$0.5-$1.0/MMBtu

 
$0.8-$1.20/MMBtu

 
$0.4-$1.0/MMBtu

 
$0.3-$0.5/MMBtu

Total = $2.0-$3.7
Greatest variability is in Upstream feedstock for
liquefaction and shipping distance

Source: Institute of
energy

U.S.
LNG European Clients

Portugal

EDP

Spain

U.K.

France

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: MAKS research     

Why
Europe looking at U.S. LNG

European
Companies will likely to make their import decisions solely based on U.S. LNG
variable cost as the fixed fees will be treated as sunk cost. Also, when
an off-taker will have the option to buy LNG from the spot market then in
that case they would elect their contracted U.S. LNG volumes only if they
find the cost of delivering U.S. LNG lower than the prevailing market
price.
The fact that
the variable cost of delivering U.S. LNG to Europe could stay lower than
rapidly falling spot prices in European region is due to a considerable
reduction in vessel charter rates and shipping fuel costs. Most of the
European companies are doing long term contract with U.S. LNG because
there are no destination restrictions for U.S. LNG buyers, have much
greater flexibility in terms of offtake volumes and no resale restriction
clauses.
To the extent
the off-takers have signed long-term contracts to secure continuous feed
gas supply for their terminal capacity, they can still sell back unwanted
gas volumes to the U.S. market at any time at a relatively small loss.
An immediate
signal that future U.S. LNG exports will give new option and chance to diversify
to Europe will send a message to Russia that within a few years, despite
its current ability to pressure Ukraine and other nations once part of the
USSR, this will no longer be possible.
Two third of the
gas produced by Russian’s state controlled company Gazprom is sold to
Europe. Russia have large market share and dominance in European Market.
But Europe doesn’t want to be reliant on Russia for its energy needs and
is supported by United States to weaken the Russian influence over Europe.
Russia uses its
power over gas as political leverage and has a past records of cutting off
supply to countries during conflicts.
Russia is also
involved in the war of Ukraine and Georgia to distort the plans of
supplying gas through pipelines from Middle East.

 

U.S. LNG Export Cost Buildup by Region

 

Cost Range ($/MMBtu)

Europe

Fixed
Capacity/Tolling Fees

2.25-3.5

Sunk
Cost

Henry
Hub + 15% Surcharge

2.0-4.0

Variable

Transport
Cost

 

 

Vessel
Charter Cost

0.2-0.6

Sunk for Some

Fuel
Cost *

0.2-1.8

Variable

Canal
Tolls

0.2

N/A

Port/Insurance/Other

x

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