Alternative Energy

U.S. Gas Drillers Are Missing Out on Asia’s Oil-Driven Cash Boom

If you’re pumping natural gas in the U.S., you’re probably missing out on Asia’s boom.

 That’s because the fortunes of most U.S. natural gas producers are pegged to the nation’s benchmark gas price, which slipped almost 9 percent since June.
Meanwhile, companies like Exxon Mobil Corp.’s partner Oil Search Ltd. sell most of their output to Asian customers linked to crude prices, which are up about 40 percent over that period. About 70 percent to 80 percent of Royal Dutch Shell Plc’s LNG is priced off oil, Chief Financial Officer Jessica Uhl said last week. And about two-thirds of BP Plc’s gas portfolio is oil-linked, Chief Executive Officer Bob Dudley said .

The dichotomy is a relic of LNG’s early days, when it competed against oil and lacked an internationally-accepted benchmark. The fundamentals of the two have deviated in recent years, as the Organization of Petroleum Exporting Countries and its allies cut output to tighten the oil market, while new LNG projects worsen a glut.

“The LNG market is facing the prospect of widely diverging prices,” said James Taverner, an IHS Markit energy analyst in London.

As OPEC-led cuts pushed Brent briefly above $70 a barrel earlier this year, Morgan Stanley was among banks to recently lift 2018 price forecasts, saying they could average $75 in the third quarter.

Costlier Oil

At $75, LNG priced at 13 percent of Brent — a common ratio — would cost $9.75 per million British thermal units. The benchmark crude will average 16 percent higher this year, according to the median of forecasts compiled by Bloomberg, which would be equivalent to about $8.27 per million Btu.

Meanwhile, U.S. Henry Hub prices are seen 1.7 percent higher this year at $3.07 per million Btu. And a slate of new export projects coming online and softer summer demand means spot LNG — that is, not bought through long-term contracts — will average $5.90 per million Btu this year in Singapore, BMI Research said in a Jan. 4 note, compared with an average $6.803 last year.

Australia’s Woodside Petroleum Ltd. sells more than 90 percent of its LNG through oil-linked contracts, Chief Executive Officer Peter Coleman said in an interview. Shell’s Uhl said the benefits of higher oil will be seen in first quarter results because the price feeds through on a lag of three to four months. Woodside and Oil Search also flagged a three-month delay.

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