There are price risks for U.S. LNG export business

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(Wall Street Journal; Aug. 12) - The latest free lunch being peddled involves exporting U.S. natural gas. Don't be surprised if it evaporates. With U.S. gas selling at around $3 per million Btu and Japan paying maybe $17 for LNG delivered to its docks, companies are racing to build plants to export U.S. gas. But if "$3 in, $17 out" sounds too good to be true, that is because it is. While the economics of exports can make sense, they are no slam-dunk. Oil is one big variable, since it determines LNG prices in Asia.

Next, the actual cost of delivering U.S. gas overseas would be much higher than $3. First, the buyer typically pays a premium over the market price, say 15 percent, to cover the cost to the facility operator of gas lost during liquefaction. Then you need to add on the fee for liquefaction, roughly $2.50 to $3. Shipping fees, meanwhile, range anywhere from about 85 cents to almost $2.80 depending on whether you're going to Europe or Asia and the route you take. Turning LNG back to gas adds another 40 cents.

All in, at a $3 gas price, U.S. LNG would cost $9.20 in Japan, leaving a nice margin. If that looks like a no-brainer, you're missing one thing: time. The earliest the U.S. is likely to start exports is 2015. Moreover, LNG plant capacity contracts typically span 20 years, so long-term expectations are critical. U.S. gas prices are expected to rise - in part because exports should help relieve the supply glut. Futures for 2016-2020 average about $5, and analysts and producers assume long-term prices of $6 or more. Suddenly, the margins would drop to $2.34 for Japan.

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