Will U.S. exports of natural gas to Japan grow?

Japan’s trade and industry ministry asked the U.S. Department of Energy (DOE) to approve U.S. liquefied natural gas (LNG) exports to Japan. This is the second request this year. The DOE approved an earlier request by Cheniere Energy to export 2 billion cubic feet per day (Bcfd) of U.S.-produced natural gas from its Sabine Pass LNG terminal in Louisiana.

Japan expects its long-term LNG requirements to grow significantly. That’s because the government has decided to shut-down several nuclear plants after the March earthquake and tsunami. The Japanese request seems likely to be approved. However, the Sabine Pass LNG export terminal project is still in the planning stage and does not yet have federal approval to be built.

Exports of U.S.-produced LNG to Japan would be very profitable. The current spot price of LNG sent to Japan is around $17/MMBtu compared to about $4 per MMBtu in the U.S. That’s about $13 more than the spot price at Louisiana’s Henry Hub. Despite the potential profits, future U.S. LNG exports face economic hurdles that include: 

  • Future price uncertainty,
  • High production costs compared to potential competitors,
  • An existing well-supplied global LNG market
  • Relatively long distance from major market centers in Asia and Europe
  • Lack of long-term supply commitments by U.S. producers provide natural gas to U.S. liquefaction terminals, and
  • The high cost of adding liquefaction.

The big take away for me is that natural gas flows wiil follow the money. The only reason that drillers are still after natural gas at these low prices in the U.S. is because it is very profitable to remove and sell natural gas liquids whose prices are tied to the price of oil. If the prices of natural liquids decilines, drillers will switch to oil and the supply of natural gas will contract which means that prices of natural gas will increase over tiime.