Caspian Report - Issue: 08 - Fall 2014

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FATIH MACIT, HOLLY REHM 16 LNG’s export capacity will be 1.7 bcf/ day and construction is slated to begin this year with full operations expected by 2019. 39 Freeport LNG, the most recently approved, plans to begin construction in 2014 and achieve commercial operations in 2018, exporting approximately 1.8 bcf/day. 40 The U.S. is also in the process of changing its policy of awarding export contracts; now only rewarding licenses to companies that have already complied with all relevant environmental regulations. The new regulations will force companies seeking to build LNG terminals to win FERC approval—a longer process costing upwards of $100 million— before they can receive approval for an export license from the DOE. Industry experts do not expect this to slow down the licensing process, but rather reward those companies with commercially-viable, well-financed, and more developed projects. 41 At the same time, the House of Representatives had recently passed legislation which would set a deadline for the Department of Energy to approve licenses for LNG applications. The legislation “would require the department [DOE] to issue a decision 30 days after the Federal Energy Regulatory Commission has completed its environmental analysis of an LNG export project.” 42 The bill was drafted by lawmakers frustrated by the slow pace of DOE approvals, and hoping to expedite the first U.S. LNG exports. The legislation will now be sent to the Senate for a vote. 43 Further, lawmakers have introduced the North Atlantic Energy Security Act in the Senate, aimed at reducing the red tape for U.S. companies to produce and export natural gas to the America’s allies abroad. In a joint editorial in the Wall Street Journal, two of the bill’s sponsors, Senators John Hoeven (R-ND) and John McCain (R-AZ), outlined the goal of the bill: “Today, the U.S. has the leverage to liberate our allies from Russia’s stranglehold on the European natural-gas market… We need to use our leverage wisely: to boost our economy at home and to strengthen our national security by helping our allies resist Russian aggression.” 44 PERSPECTIVES ON FUTURE LNG EXPORTS In this section of the report, we will analyse the potential for U.S. LNG exports to European and Asia-Pacific markets, considering whether these exports will change the market dynamics in these regions. The current LNG terminal projects and their capacities reveal that LNG exports to Europe or Asia might begin in late 2015, but not in volumes that will change the market conditions. Sabine Pass terminal is supposed to be the first to launch LNG exports, and its annual capacity is approximately 22 bcm. While we believe that there 39. Sempra Energy. 2014. Cameron LNG: Expansion Update. http://cameronlng.com/expansionupdate.html (accessed July 14, 2014). 40. Freeport LNG. 2014. Project Status and Schedule. http://www.freeportlng.com/Project_ Status.asp (accessed August 5, 2014). 41. Crooks, Ed. 2014. “US shakes up LNG export rules,” Financial Times. (05/30). http://www. ft.com/intl/cms/s/0/bff2c2d8-e799-11e3-88be-00144feabdc0.html#axzz37WGpCTlk (accessed July 14, 2014). 42. Rascoe, Ayesha. 2014. “U.S. House passes bill speeding up decisions on LNG export requests.” Reuters. (06/26). http://in.reuters.com/article/2014/06/25/usa-lng-exportsidINL2N0P623020140625 (accessed July 10, 2014). 43. Ibid. 44. Hoeven, John and John McCain. 2014. “Putting America’s Energy Leverage to Use,” Wall Street Journal. (07/28) http://online.wsj.com/articles/john-hoeven-and-john-mccain-puttingamericas-energy-leverage-to-use-1406590261 (accessed August 5, 2014).
might be other terminals that can begin LNG exports, our argument is that the U.S. LNG exports will not be sufficient to fundamentally change European or Asia-Pacific markets, for various reasons. First of all, price dynamics both in U.S. markets and export markets will constrain LNG trade. The estimated cost of liquefying and shipping a thousand cubic feet of natural gas from U.S. to European markets is approximately $4, and this rises to $6 when selling to Asian markets. One should also take into account the fixed costs involved in this process. It costs about $4 billion to build a liquefaction plant with a daily export capacity of one billion cubic feet. There are also important sunk costs related to obtaining necessary approvals for LNG export. For LNG trade between the United States and these markets to be viable, there should be a reasonable price difference. Although the spot LNG price in Asia declined by almost 40% in the first half of 2014, there is still a $7 difference between the LNG price in United States and the price in Asia-Pacific markets. In 2013, the difference was much more marked. The average LNG price in Asia for 2013 was $16.3 compared with $3.7 in the U.S. Though the price difference between the United States and Europe is smaller in comparison, there was still a price difference of approximately $7 between these two markets in 2013. Therefore, there seems to be a profit opportunity in terms of exporting LNG to Asia. However, supply and demand pressures may rapidly eliminate this profit opportunity if the export volumes reach high levels. Energy Information Administration (2012) estimates that every billion cubic feet a day of exports might lead to a 10 to 20 cent increase in the price of per thousand cubic feet of natural gas. Thus if U.S. LNG exports either to European or Asian markets reach to LARGE LNG EXPORTS BY UNITED STATES TO EUROPEAN OR ASIAN MARKETS MAY PUT A SIGNIFICANT DOWNWARD PRESSURE ON GAS PRICES IN THESE MARKETS. 100 bcm per year, the domestic price may go above $6. This price increase will happen for two reasons. Firstly, export of natural gas will limit the supply to the domestic markets, and this will immediately be reflected in a price increase. Secondly, some of the export capacity will come from new production, and the development of new gas production fields requires higher gas prices to allow the development of fields that were previously not profitable due to low gas prices. To sum up, high levels of LNG export will lead to an increase in domestic prices, and will reduce the price difference. The second aspect is related to the price dynamics in the export markets. Large LNG exports by United States to European or Asian markets may put a significant downward pressure on gas prices in these markets. This will narrow the price difference between these markets and again eliminate profit opportunities for LNG exporters. Thus market dynamics will put a downward pressure on price difference on both sides, and may thereby inhibit the growth of LNG exports. The second key barrier to high volumes of U.S. LNG exports to European and Asian markets is increased pipeline trade in natural gas trade. We will assess this separately for Europe and Asia. Europe is already the largest consumer and importer of natural gas in the world, and obtains the majority of its natural gas imports via pipelines from Russia. The region gets some LNG from Qatar, Algeria, and Nigeria, but the total LNG imports only amounts to 10% of total consumption. Europe’s LNG capacity is massively under-utilised due to high prices observed in Asian mar- 17 CASPIAN REPORT, FALL 2014
Page 1: CASPIAN PUBLISHED BY CASPIAN STRATE
Page 4 and 5: Dear Readers, CASPIAN REPORT 2 It i
Page 6 and 7: CASPIAN CASPIAN REPORT 4 06 FATIH M
Page 8 and 9: FATIH MACIT, HOLLY REHM 6 THE U.S.
Page 10 and 11: FATIH MACIT, HOLLY REHM 8 shale rev
Page 12 and 13: FATIH MACIT, HOLLY REHM 10 in the 1
Page 14 and 15: FATIH MACIT, HOLLY REHM 12 SINCE TH
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Page 20 and 21: FATIH MACIT, HOLLY REHM 18 kets, pa
Page 22 and 23: MANFRED HAFNER 20 THE SOUTHERN GAS
Page 24 and 25: MANFRED HAFNER 22 THE DOCUMENT RECO
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Page 30 and 31: MANFRED HAFNER 28 by the Shah Deniz
Page 32 and 33: MANFRED HAFNER 30 Snam Rete Gas has
Page 34 and 35: MANFRED HAFNER 32 THE ESTABLISHMENT
Page 36 and 37: MATTEO VERDA 34 LNG MARKET: TRENDS
Page 38 and 39: MATTEO VERDA 36 traditionally accou
Page 40 and 41: MATTEO VERDA 38 bcm), Brunei (9 bcm
Page 42 and 43: MATTEO VERDA 40 for transport vesse
Page 44 and 45: MATTEO VERDA 42 of the global LNG m
Page 46 and 47: MUBARIZ HASANOV 44 AN OVERVIEW OF E
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Page 52 and 53: Figure 7. Price of transport fuels
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Page 56 and 57: Figure 13. Breakdown of electricity
Page 58 and 59: THE SOUTHERN GAS CORRIDOR - WINDOW
Page 60 and 61: NINO KALANDADZE 58 become comprise
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NINO KALANDADZE 66 tion of Crimea b
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RADU DUDAU 68 THE UKRAINE CRISIS: L
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RADU DUDAU 70 RUSSIA HAS FREQUENTLY
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RADU DUDAU 72 Russia, which depends
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RADU DUDAU 74 WHAT INTERNATIONAL LA
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RADU DUDAU 76 THE NEAR FUTURE WILL
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RADU DUDAU 78 THE UKRAINIAN GOVERNM
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RADU DUDAU 80 parliament decided to
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Black Sea Serpents’ Island. RADU
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RADU DUDAU 84 (where Russia holds v
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RADU DUDAU 86 IN TERMS OF ENERGY, A
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WHY RUSSIA SIGNED A MAJOR GAS CONTR
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MESUT HAKKI CASIN 90 I will focus o
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Russian President Vladimir Putin sh
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Figure II: Russian energy infrastru
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Kazakhstan President Nursultan Naza
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MESUT HAKKI CASIN 98 economic devel
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Figure IV: China’s gas import sou
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THANOS DOKOS, THEODORE TSAKIRIS 102
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ARZU YORKAN 114 TURKEY’S RENEWABL
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ARZU YORKAN 116 is 12 th in the wor
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Figure 4: Solar Energy Potential At
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ARZU YORKAN 120 Figure 8: The share
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ARZU YORKAN 122 THE STRATEGY PAPER
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ARZU YORKAN 124 TURKEY HAS NOT YET
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CASPIAN
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THE EU AGREEMENT ON THE 2030 FRAMEW
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EU Commission President Jean Claude
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ROMAN RUKOMEDA 132 THE PHANTOM OF R
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Russia’s gas giant Gazprom CEO, A
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CASPIAN CALL FOR PAPERS 136 Caspian
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Caspian Report - Issue: 08 - Fall 2014

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