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US Lng Exports: License Policy And Early Mover Advantage

|Includes:BRGXF, Dominion Resources, Inc. (D), ENGIY

The change in the US policy for lng export licenses clearly shows the administration will keep its thumb on the sector and ensure it will safeguard US interests first and foremost. This is a move to signal that US gas will not flood the market, amongst others. But, I do expect growing volumes nevertheless over the long term. There is a negative impact for financing availability as risk has increased from pushing off take certainty to a later stage in project development. Names with existing projects and/or provisional export licences in place stand out: GDFSuez, Dominion (NYSE:D), Kinder Morgan (NYSE:KMP) and BG.

Whilst the world eagerly looks for US lng exports, the US administration has now changed its export policy for lng to the effect that exporters have to obtain FERC approval before being able to apply for export licenses. Projects will only get export licences once they have all required environmental permits, according to a statement by DOE officials.

The principal impact is that export licences will be more admin intensive and costly to get hold of. Of the current seven provisional export licenses, only one project has the relevant FERC permits. DOE will not award any more provisional licenses.

DOE says it is looking to make sure only really commercially advanced projects get a license and it has good visibility on.

I see this as DOE indeed aiming for market transparency as one element of consideration: Lng export projects are costly and lengthy in the initial phases and pushing out the export licences to as late a stage as possible could be an attempt to avoid over-licensing for uncertain projects. Note that there is not much change fundamentally as projects always had to get both sets of permits.

However, there are negative implications. Under the old regime, the export licence at an early stage would increase visibility for the project. Uncertainty over export volumes up to a much later stage will increase financing hurdles and risk for the developers. That may come back to alter the capacity build outlook, and ultimately with it, resource development. Ultimately, to an extent that may be one of the consequences DOE has in mind, avoiding speculation with capacity build and over-capacity.

At this point, the theoretical capacity of all projects under consideration would amount to 36bcf/day, which is c 50% of production volumes. In reality, there will be a large number of projects that won't come to fruition. But, it illustrates why the government is looking to constrain license applications.

The new regime will not lead to any major change in the outlook for lng export volumes. It is my view that the US will increase its lng export volumes, but that it will be very diligent with regards to licences and its own domestic and global market interests. DOE has clearly stated that it will only award licenses if they are in the public interest. I gather that means ensuring low domestic prices and optimisation of the volume/price equation on global markets.

The US government will tightly control volumes onto global markets. Do not expect a flood of gas from the US. This policy change is also a signalling move to show that there would be unconstrained large volumes of gas coming onto global markets.

That being said, there will be incremental volume and much greater flexibility in the US and global markets from increasing exports. There will be an impact on global gas markets. Not thatUS shale resources will drive global prices as the prime factor, but there will be reshaping of flows and prices.

I would expect Europe to look for some volumes from North America in its supply diversification drive. Asia will compete for that.

Companies with operating and licensed terminals are immediate beneficiaries. GDF Sue stands out through its excellent US lng assets that it has diligently built out a long time ago, particularly the East Coast Everett and Neptune ports. The Trinidad and Tobago assets complement that further.

Dominion (D) also has well positioned East Coast facilities as had Kinder Morgan (KMP).

BG's 2bcf/day Lake Charles export project has filed its FERC applications. It already has a conditional DOE license.

Stocks: D, ENGIY, BRGXF