US infrastructure operator Cheniere Energy believes LNG exports from its new Sabine Pass terminal are contributing to radical changes in global gas markets. 

Formerly, the LNG business was tightly controlled, from the producers' upstream operations right the way down to the customers' import terminal. 

The industry now has to deal with an abundance of supply and the emergence of a flexible, competitive and increasingly liquid market place.

At the same time, as Cheniere's Vice President for Strategy Andrew Walker freely acknowledges, current conditions are also raising some difficult questions concerning gas prices.

Speaking at a conference organised by the Atlantic Council in Washington DC on 28 April, just two days after the arrival in Portugal of Cheniere's first LNG cargo to Europe, Walker stressed the role that US LNG was playing in transforming global gas markets.   

"Why do we think it is important?" he asked. The answer, he said, is that the start of US exports "is making LNG abundant."  He continued: "In the past, it has come from countries that were centrally controlled, from national oil companies. There was no commercial competition between companies wishing to export; supply and demand went together in lockstep. It was an industry characterised by shortage."

However, he added, "Australia and the US have allowed construction of multiple projects; that's why we have LNG abundance."

Nonetheless, he noted, "abundance on its own doesn't change things; you need cost-competitive supply." In this regard, he thought the US had a distinct advantage over its competitors, arguing that infrastructure costs for new LNG US projects were just one-third of those in Australia.

Walker considered that the LNG business was changing from "an industry that was constrained to an industry with abundant supply and transparent price," and, he added, "that's ultimately good for the consumer, (it means) a more competitive market place."

The Cheniere VP stressed that the US is putting destination-free volumes into the market place. When the Creole Spirit docked at Sines in Portugal on 26 April, it was carrying a cargo that had been bought on the spot market.

To Walker, such destination-free volumes meant there was flexibility on how consumers could use the gas. The LNG business, he considered, becomes "much more responsive, much more resilient." Above all, he argued, such trades will increase liquidity. They marked, he said, "a real change in the industry, which at present is pretty much illiquid."

He noted: "It's good for gas. It means the industry is listening much more to what the buyers want, and it becomes a much more price competitive market base." He added: "You have to be competitive; if you are a seller, you have to be attractive to customers."

US exports are lowering fuel bills tangibly in Europe and Asia, Walker argued. "They are incentivising the abundance, the acceptance of gas." This would allow new markets to open and existing markets to grow. In this context, he particularly expected to see growth coming from some countries in eastern Europe, along with Pakistan and Jordan.

End of the Glory Days

Walker considered that US LNG deliveries would "reduce the leverage of the more monopolistic suppliers" in areas where there is little or no diversity of supply. He acknowledged he was thinking of one country in particular, but added: "Russia comes to the forefront, but there are other places that have low diversity."

Asked about possible changes in the way in which gas might be priced in future, Walker had this to say: "Will there be a spot liquid component that is priced like oil? Yes, absolutely, I think we are going to see that in the next five years. That's the first step. The next step is to create cargo liquidity in the market place." He then raised the possibility that the upsurge in competitive LNG exports might result in "a cargo index in Japan, Singapore or China – or all three."

While Walker evidently believed that such competition would lead to a narrowing of price differentials around the world, he did not think the result would necessarily be a single gas price. "We are going to see global gas prices – in the plural – because there will still be regional markets," he argued.

As for current prices and the differential between generating enough income from gas sales to cover current expenditure and the price required to recoup investments, Walker noted first that it costs Cheniere $7/mn Btu to send gas to Europe. He then added: "But LNG will be a price taker from Europe. Unfortunately, we are heading at looking at cash costs rather than full costs of the supply.

He continued: "It will take $7-8/mn Btu to incentivise new investment.  We have cheap spot prices in Europe at the moment: $4.38. So that doesn't incentivise."

He concluded with the following question: "Do suppliers just take four dollars now and hope for better later?" With seven commissioning cargoes already dispatched from the Sabine Pass terminal in an era of relatively low gas prices, Walker's question was rhetorical.

John Roberts, Chief Analyst, Natural Gas Europe

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