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Fitch: U.S. Natural Gas Exports Face Long-Term Challenges

Wednesday, 15 February 2012 | 11:00
Fitch regards the measured conversion of some U.S. liquefied natural gas (LNG) terminals to allow the export of liquid natural gas as positive. However, currently favorable margins for U.S. LNG exports may not be sustainable and could set up long-term risks for these infrastructure projects.
The combination of shale gas reserves and weak economy has pushed prices to a level approaching the marginal cost of production. We expect the recent low prices for natural gas to continue, as supply should remain high. The U.S. Energy Information Administration projects shale gas production to increase from 5.0 trillion cubic feet in 2010 to 13.6 trillion cubic feet in 2035. We also expect the Department of Energy to continue to grant licenses to construct or reconfigure LNG terminal facilities to increase the volume of exportable resources. However, several risks have been identified in this scenario that could disrupt this expansion and the securities funding them.
Most pricing projections for liquid natural gas assume that fracking will continue to be used. The immediate future is uncertain as the short- and long-term potential environmental impacts are examined. We also see the potential for exploitation of shale gas reserves in many other countries. Some have significant advantages over U.S. distributors.
The largest buyers of liquid natural gas are South Korea and Japan. Vast shale gas deposits exist in nearby China. The U.S. Geological Survey estimates those deposits at 32 billion metric tons, of which 4.4 billion metric tons are technically exploitable and economically feasible. Should discoveries of nonconventional natural gas flourish there, the combination of low labor costs and small shipping cost due to the proximity of these countries could lessen the traffic at U.S. marine terminals constructed to export natural gas.
Some of these market risks can be spread to different portions of the industry by contracts. For example, on Jan. 26, Cheniere announced it had reached a sale and purchase agreement with BG Gulf Coast stipulating that, in the event the facility is idled, BG will continue to pay an amount likely to satisfy debt charges and other costs. Terminals lacking similar sales contracts that are exposed to merchant market price risk are unlikely to attract viable debt financing.
Source: Fitch Ratings
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