Tags: gasoline | export | crude | oil

Cheap Gasoline Makes US Only Place Where Export Makes Sense

Tuesday, 13 January 2015 08:59 AM

While plunging prices tied to oil have derailed natural gas export projects from Australia to Africa, U.S. plans to build new terminals are getting a boost from a pricing system that charges a set fee to liquefy and ship the gas.

The U.S. model is based on how much gas is bought, not on the price of Brent, the global crude oil benchmark. Linking the price of liquefied gas, or LNG, made sense when Brent was above $100 a barrel. Now, it’s priced at less than $50 after losing more than half its value in six months.

That means new LNG facilities whose output remains tied to crude prices will struggle to make money even as more capacity comes online. U.S. suppliers, meanwhile, can be expected to deliver deliver some profits even as energy markets slump, said Chris McDougall, vice president of research at Westlake Securities LLC in Austin, Texas.

“Oil prices have dropped but U.S. LNG still looks good,” McDougall said in a telephone interview. “There are enough buyers that are willing to commit to paying some fee for the ability to access U.S. gas pricing.”

The deals that link crude and LNG prices are widely used in Asia, at a cost of about 14 percent of the value of a barrel of Brent for every million British thermal units of gas. Falling oil prices mean cheaper LNG, making the fuel from the region more competitive with U.S. exports and more attractive to buyers.

For sellers, sliding prices threaten profit for LNG terminals. Projects in Australia, for example, would get less than $7 per million Btu of LNG; they need at least $14 to make a profit, according to a study from Harvard University’s Belfer Center for Science & International Affairs.

U.S. Suppliers

Those figures put U.S.-based suppliers in a winning position, said Leonardo Maugeri, a researcher at the Belfer Center. At the same time, the U.S. has lower labor and capital costs than Australia, where LNG construction has strained a limited workforce and sent salaries soaring.

LNG plants in the U.S. “have the best economics,” said Mauger, a former executive at Italian oil producer Eni SpA, in a telephone interview. “Projects still on paper in Australia for sure will be postponed or will die, and that’s it.”

Chevron Corp., based in San Ramon, California, and Royal Dutch Shell Plc are among producers racing to supply the cleanest fossil fuel to Japan and other large consumers amid opposition to coal and nuclear power. Slumping oil prices are pouring cold water over an investment frenzy that led to scores of LNG ventures, leaving a handful of U.S. projects as front-runners.

Toll System

In the U.S., developers will charge a set fee to liquefy and ship the gas, based on how much capacity buyers want to secure, similar to deals for pipelines. In some cases, buyers procure the gas themselves in a market where the fuel currently sells for less than $3 a million Btu.

U.S. producers can be profitable and compete for Asian contracts even with oil below $50 a barrel, according to the Harvard study.

The diverging fortunes of gas exports can be shown in the differing potential for two suppliers.

Cheniere Energy Inc., the Houston-based developer of the first U.S. LNG export terminal in decades, gained 63 percent in 2014, partly on plans to start shipping from its $12 billion plant in Cameron Parish, Louisiana, by year-end. In December, the Houston-based developer announced a 20-year deal to deliver LNG to Energia de Portugal SA and received a permit to build a second terminal in Corpus Christi, Texas. Cheniere declined to comment for this story.

Shares Down

The Australian producer Woodside Petroleum Ltd., based in Perth, didn’t fare as well as the oil rout cast a shadow over its plans for a $35 billion LNG project off Australia’s western coast. Its shares ended 2014 down 2.3 percent, after gaining as much as 13 percent, and the company announced last month it will delay until mid-2016 a final decision on whether to pursue the west coast project.

The Woodside delay echoes recent ones by BG Group Plc and Petroliam Nasional Bhd on projects for Canada’s Pacific Coast.

Petronas, as the Malaysian state-run producer is known, said last month it’s seeking ways to align costs in Canada with lower costs in the U.S. before deciding whether to move forward with its C$36 billion ($30 billion) Pacific NorthWest LNG project in British Columbia.

The seven plants under construction in Australia include the $54 billion Chevron-backed Gorgon project, whose price tag increased by $17 billion from initial estimates partly because of higher labor costs.

Sempra Facility

In the U.S., Sempra Energy broke ground on its Cameron LNG facility in October in Hackberry, Louisiana. Dominion Resources Inc. began construction activities the same month at its Cove Point project in Lusby, Maryland.

Other planned U.S. projects include Cheniere’s Corpus Christi plant, the Jordan Cove LNG terminal backed by Calgary-based Veresen Inc. and Oregon LNG, proposed by Leucadia National Corp. Freeport LNG Development LP plans a $14 billion terminal in Quintana Island, Texas.

Veresen is in talks with buyers in Asia, after spending more than $130 million on permitting, environmental analysis and other review procedures required by regulators, said Dorreen Miller, director of investor relations.

“Our potential customers are quite comfortable with North American gas over the long term,” Miller said.

Labor and construction costs may increase for LNG plants in the U.S. if several are built at the same time, while competition for contracts will limit how many can secure deals, Harvard’s Maugeri said.

“No matter how many authorizations the Department of Energy gives, I think that no more than five to six LNG plants will actually materialize in the United States,” he said.

Still, the advantage is clear, Westlake’s McDougall said.

“The U.S. projects are less sensitive to what oil prices are,” he said. “The things it has going for it are low capital costs to develop and a deep resource base.”

© Copyright 2018 Bloomberg News. All rights reserved.

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While plunging prices tied to oil have derailed natural gas export projects from Australia to Africa, U.S. plans to build new terminals are getting a boost from a pricing system that charges a set fee to liquefy and ship the gas.
gasoline, export, crude, oil
Tuesday, 13 January 2015 08:59 AM
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