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The U.S. Should Build East Coast LNG Capacity

Jul. 18, 2014 2:24 PM ETAR, CHK, CNX, CTRA, CQP, EQT, OGZPY, RICE-OLD, RRC, LNG37 Comments
Richard Zeits profile picture
Richard Zeits
10.42K Followers

Summary

  • The explosive growth of natural gas production from the Marcellus and Utica have created regional supply surplus in the Northeast.
  • Given the region’s overwhelming cost advantage and vast resource base, an LNG solution appears logical.
  • Despite the sheer size of the currently proposed U.S. LNG capacity, the majority of the Atlantic Basin facilities are already “spoken for.”.
  • Demand for additional facilities may be strong.
  • East Coast LNG projects would make sense from the economic and public interest perspectives.

Just as recently as three years ago, the idea of U.S. LNG exports appeared to be a daring business concept that, however, seemed unlikely to materialize on a large scale. Skeptics would have to admit, the pioneers of this concept - such as Cheniere Energy (LNG, CQP) - have proven themselves correct. The U.S. LNG exports are becoming a reality a lot quicker than even optimists could anticipate. Six large Atlantic Basin LNG projects with combined export capacity of over 9 Bcf/d are either fully subscribed or are getting close to being fully subscribed. The majority of these facilities are estimated to see their first shipments during the 2016-2020 period.

(Source: Cheniere Energy, June 2014)

While permitting and construction delays are fairly common in highly complex, multi-billion dollar projects, there is less and less doubt that a large portion of the facilities that have already found subscribers will come to fruition and be in-service reasonably close to their currently indicated time frames.

U.S. LNG - Cost Advantage

The concept of exporting natural gas from the U.S. is based on the simple thesis that the U.S. LNG can compete on the cost of supply with the majority of new LNG projects proposed elsewhere in the world and, increasingly, Gazprom's (OTCPK:OGZPY) pipeline supply to Europe. As an illustration, Cheniere often presents a comparison of current natural gas price at delivery points in key LNG-importing regions to what would be the effective price of U.S.-originated LNG based on the structure of Cheniere's contracts. The comparison shows that, at current pricing, the U.S. LNG would be the cheapest alternative.

It is important to note that the majority of the U.S. LNG export contracts are "tolling" arrangements. The customer pays the LNG operator, typically on a take-or-pay basis, for a certain amount of liquefaction capacity and pipeline access to the pipeline

This article was written by

Richard Zeits profile picture
10.42K Followers
Richard Zeits is an Oil & Gas industry analyst and consultant. His background includes fourteen years as Energy industry-focused investment banker, portfolio manager and senior investment analyst with bulge bracket firms in New York. Zeits Energy Analytics use elaborate proprietary analytics and data bases to provide in-depth industry research, market intelligence, and forecasting.

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