Compelling economics for NAM LNG exports to Asia.
Long-term LNG contracts into Asia are oil-indexed — between 2010 and 2011, LNG prices in Japan averaged ~13.5% of Brent, or roughly $12.80/mmBtu. If we assume an oil price of $100/bbl, and an LNG tanker rate of $140k/day, we find that domestic prices could increase to $7.90/mmBtu before the arb from the USCG to Japan (via the Panama Canal) would close. Economics from the West Coast (i.e. Canada) are even more compelling ($8.60/mmBtu), given lower freight costs. Imported LNG into Korea averaged ~12% of Brent in 2010-11. Still, domestic prices could increase to $6.35/mmBtu before the USGC-Korea arb was shuttered.

The arb between USGC liquefaction projects and Europe is more vulnerable. NBP prices (a proxy for NWE gas prices) averaged ~8% of Brent prices between 2010 through 2011. Again, assuming an oil price of $100/bbl and an LNG tanker rate of $140k/day, the cross-Atlantic arb would close as Henry Hub gas prices trades above $3.60/mmBtu.

However, while NAM LNG exports may not be competitive for European markets on a regular basis under our long-term price assumptions, there may be periods when the cross- Atlantic LNG arb opens.

South America is another possible market for NAM LNG. Not only is there a freight advantage in shipping to South America, especially from the US, but the seasonality of demand also supports export economics. Demand in the Southern Hemisphere peaks when North American demand is typically weaker — our summer is their winter. Indeed, in the recent past, South American buyers have paid nearly as much as consumers in Asia. Moreover, although the size of the South American market is small today (~1 bcf/d), significant potential exists.

West coast freight advantage. The voyage from Kitimat in Canada to Japan at 18 knots is roughly 10 days, 11 days shorter than the same voyage from the USGC. This shorter distance translates into a freight advantage of roughly $1.00/mmBtu. To be clear, our assumptions assume voyage through the Panama Canal (at a toll of $400,000). Without the Canal, the voyage from the USGC to Japan would be 15,000 nautical miles, up materially from the 9,250 miles through the canal.

Eoin Treacy's view The abundance of energy resources and particularly gas lend the USA a significant advantage in energy cost management. It is only a matter of time before the US begins to export natural gas but even then it will be years before significant export capacity will be completed.

At present the US market is labouring under a supply surfeit which is slowly being chipped away by increased demand and the shuttering of uneconomic supply. $4 represents a psychological Rubicon for the market since so much more supply becomes profitable at that level. Meanwhile prices continue to hold a progression of higher reaction lows and a sustained move below $3.35 would be required to question current scope for continued higher to lateral ranging.