The Center for Energy Studies (CES) of Rice University’s Baker Institute for Public Policy released a report on Feb. 18 entitled: Natural Gas Price in Asia: What to Expect and What It Means. This study used the Rice World Gas Trade Model to predict what could happen in coming years as the United States and other nations rush to take advantage of the increased Asian demand for gas driven, in major part, by the Fukishima disaster and the resulting shutdown of the Japanese nuclear powerplant fleet.
While the study pertains to U.S.-Asia LNG trade, the implications for Europe are also profound. Consider this:
The eventual emergence of new suppliers in the global gas market makes it paramount to consider what the increased trade in LNG will do to the nature of pricing. As the U.S. becomes an LNG exporter, the effects on global markets could be profound. The global gas market will deepen and become physically linked to the most liquid continental natural gas market in the world [the U.S. market]. This should in turn promote greater trade and ultimately alter the liquidity paradigm that has dominated the Asia-Pacific market, which will in turn alter the manner in which natural gas is priced in Asia…
Even if, ex post, the compression of the JKM-Henry Hub price differential renders U.S. LNG liquefaction investments less profitable than forecasts suggest, the establishment of a link from U.S. supplies to foreign markets will have potentially dramatic implications. A direct link between the U.S. and abroad will only serve to accelerate international market liquidity, thereby lowering liquidity risk. This could, all else equal, alter the financing risk of LNG projects and lower the importance of oil-linked bilateral relationships. In any case, as the story continues to unfold, the international gas market will evolve into something dramatically different from what it is today.