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A fter three years of relative stability, growth in exports of LNG, or liquefied natural gas,
oil prices have fallen sharply since associated with the development of LNG projects);
mid-2014. The effects of this drop transportation (led by particularly strong demand
on a wide range of energy compa- growth from trucks, with compressed natural gas
nies have been material, with many increasingly substituting for diesel fuel and gaso-

players forced to rethink invest- line); power generation (with gas increasingly re-

ments, cost structures, and even business mod- placing coal-fired generation); and the residential

els. And a high degree of uncertainty about where and industrial segment (owing mainly to an uptick

oil prices will go next remains. Will prices bounce in industrial activity). Given that oil prices have been

back, as history suggests they will? Or have we en- halved since mid-2014, however, some of those

tered a “new normal” consisting of a fundamentally assumptions—specifically for exports and trans-

different pricing environment? portation—must be revisited.

Global natural-gas markets have already felt some Let’s look first at exports. The EIA projected that

impact from the slide in oil prices. But those mar- U.S. LNG exports would exceed 70 bcm in 2020,

kets will be affected to a much greater degree if oil propelled by the price competitiveness of U.S. sup-

prices remain in the $50-to-$60 range for an ex- plies in the global arena. But the fall in oil prices

tended period, given the undermines that as-

interaction that exists be- Global natural-gas markets have sumption. For U.S. LNG
tween the two fuels. Gas already felt some impact from the exports to appeal to buy-
prices in some markets slide in oil prices. But those markets ers in Asia and Europe,
will be affected to a much greater
are still contractually tied degree if oil prices remain in the $50- spreads between U.S.
to oil prices; there are also to-$60 range for an extended period, Henry Hub prices and
substitution effects, with given the interaction that exists prices in Asia (which are
users switching between between the two fuels. indexed to the price of oil)
oil and gas in response and Europe (which are in-
to changes in pricing dy- dexed mainly to prices at

namics. hubs such as the U.K.’s
Gas markets will not react National Balancing Point

uniformly, however, be- and the Netherlands’ Ti-

cause of a host of market-specific factors. Below tle Transfer Facility) must be sufficiently wide. But

we examine the three core markets - the U.S., Asia spreads have narrowed considerably as oil prices

and Europe - to gauge their likely response to a have fallen.

protracted period of low oil prices and to identify This is illustrated by the narrowing of the spread

where some of the resulting risks and opportunities between the free on board (FOB) cost of U.S. LNG

for industry players might lie. exports from the East Coast and Asian LNG im-

port prices as oil prices have fallen (1). When oil was

The U.S. market: falling $100 per barrel, the spread was between $6.40
demand and supply and $7.60 per million British thermal units (MMBtu).

(To calculate this range, we have assumed a Henry
Hub price of $3 to $4 per MMBtu.) If oil prices re-

Sustained low oil prices will put downward pres- main in the $50-to-$60 range for an extended pe-

sure on both demand and supply in the U.S. natu- riod, the spread will collapse to between $–0.60

ral-gas market. Let’s look first at demand. and $1.95.

Given the narrowed spread and current LNG trans-

Demand portation costs from the U.S. East Coast to Asia
(approximately $2.50 to $3.50 per MMBtu), the

In 2014, U.S. natural-gas demand totaled 690 bil- economics of the U.S. exporting LNG to Asia look

lion cubic meters (bcm), with the residential and increasingly less compelling. Figure 1 shows how

industrial segment accounting for two-thirds of the competitive position of U.S. LNG exports in

that total, and power generation the rest. The U.S. Asia could evolve if the recent pricing environment

remains a net importer of natural gas, with net im- - oil in the $50 to $60 per barrel range, and Henry

ports of approximately 35 bcm in 2014, primarily Hub gas at $3 to $4 per MMBtu – were to prevail

from Canada. But imports have fallen sharply since for an extended period.

the last decade, when the U.S. was importing As a consequence of these dynamics, we ex-

roughly 100 bcm per year. pect to see delays in, and ultimately cancellation

The U.S. Energy Information Administration (EIA) of, some LNG-export projects in the U.S. Mature

projected that U.S. demand for natural gas would projects that have already passed major regulatory

total 770 bcm in 2020. This projection, however, milestones, and whose companies have secured

was issued in early 2014 (that is, before the decline firm long-term commitments for the project’s ca-

in oil prices) and assumed demand growth across pacity from reputed buyers, will probably move

all major segments: natural-gas exports (driven by forward and be completed on schedule. Such

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