CurrentScenario of LNG market in the U.S. The United States is expected to become one of the world’s top gas exporters by 2020, led by shale evolution which fuels rapid growth in domestic production; leading to a fall in gas prices and a drop in greenhouse gas emissions as power generation switches from coal to gas, as well as reducing America’s historical reliance on fossil fuel imports.

According to IEA forecast the US would generate almost 40% of the rise in global gas output between 2016 and 2022. Graphical representation below   shows U.S. Lower 48 production of natural gas by source, with shale gas accounting for a significantly increasing proportion of total U.S.

Lower 48 natural gas production. Shale gas production is projected to account for over 60% of U.S.

Lower 48 natural gas production by 2040.   Source: EIA AEO 2017 GeneralU.S. LNG Contract Terms U.S.

LNG and liquefaction capacity in case of tolling agreements are sold in majority under the long-term twenty-year contracts (LNG & natural gas exporters around the world typically require long-term offtake agreements and relatively inflexible volumetric commitments from buyers to justify their upfront investments in highly capital-intensive field development and gas infrastructure assets), but buyers of U.S. LNG are not restricted by destination and offtake volumes clauses. The contract terms typically run about 115 percent of the price of U.S. natural gas (currently $2.81 per MMBtu, Q4 2017) with an additional $3.00 per MMBtu for liquefaction fees.

After other charges for shipping, insurance and regasification are factored in, the total cost of U.S. natural gas at LNG terminals in Europe is anywhere from $7 to $8. Depending on the contract type, off-takers from U.S. terminals have to pay a fixed capacity charge or a tolling fee of approximately $2.25 to $3.5 per MMBtu, which they are bound to regardless of exported volumes, but are under no obligation to lift any of the contracted LNG (or pay for it in full, including the cost of feed gas and the natural gas used during the liquefaction process) if the economics of exporting U.

S. shale gas becomes disadvantageous on a variable cost basis. U.S.

LNG export valuechain Exploration & Production Liquefaction Shipping Regasification & Storage   $0.5-$1.0/MMBtu   $0.8-$1.

20/MMBtu   $0.4-$1.0/MMBtu   $0.3-$0.5/MMBtu Total = $2.0-$3.7 Greatest variability is in Upstream feedstock for liquefaction and shipping distance Source: Institute ofenergy U.S.

LNG European Clients Portugal EDP Spain U.K. France               Source: MAKS research      WhyEurope looking at U.S. LNG European Companies will likely to make their import decisions solely based on U.S.

LNG variable cost as the fixed fees will be treated as sunk cost. Also, when an off-taker will have the option to buy LNG from the spot market then in that case they would elect their contracted U.S. LNG volumes only if they find the cost of delivering U.S. LNG lower than the prevailing market price. The fact that the variable cost of delivering U.S.

LNG to Europe could stay lower than rapidly falling spot prices in European region is due to a considerable reduction in vessel charter rates and shipping fuel costs. Most of the European companies are doing long term contract with U.S. LNG because there are no destination restrictions for U.S. LNG buyers, have much greater flexibility in terms of offtake volumes and no resale restriction clauses. To the extent the off-takers have signed long-term contracts to secure continuous feed gas supply for their terminal capacity, they can still sell back unwanted gas volumes to the U.S.

market at any time at a relatively small loss. An immediate signal that future U.S. LNG exports will give new option and chance to diversify to Europe will send a message to Russia that within a few years, despite its current ability to pressure Ukraine and other nations once part of the USSR, this will no longer be possible. Two third of the gas produced by Russian’s state controlled company Gazprom is sold to Europe.

Russia have large market share and dominance in European Market. But Europe doesn’t want to be reliant on Russia for its energy needs and is supported by United States to weaken the Russian influence over Europe. Russia uses its power over gas as political leverage and has a past records of cutting off supply to countries during conflicts.

Russia is also involved in the war of Ukraine and Georgia to distort the plans of supplying gas through pipelines from Middle East. U.S. LNG Export Cost Buildup by Region   Cost Range ($/MMBtu) Europe Fixed Capacity/Tolling Fees 2.25-3.

5 Sunk Cost Henry Hub + 15% Surcharge 2.0-4.0 Variable Transport Cost     Vessel Charter Cost 0.2-0.6 Sunk for Some Fuel Cost * 0.

2-1.8 Variable Canal Tolls 0.2 N/A Port/Insurance/Other <0.1 Variable Regasification Cost 0.

3-0.4 Variable Est. Total Cost Range 5.0-10.6   *Fuel cost includesthe cost of the boil-off gas (BOG) and the marine fuel that LNG carriers usefor propulsionSource: Energypolicy.columbia.eduDelivered Cost ofU.S.

LNG in Europe in 2012 and 2016 ($/MMBtu)  Main Assumption Unit 2012 Sept 2016 Henry Hub Prices $/MMBTU 2.75 2.84 Bunker Fuel Price (IFO 380) $/ton 650 300 Charter Rate(Spot) $/day 120,000 33,000 Voyage time (one-way) Days 11 11     Source:Energypolicy.columbia.eduAnalysis As of September 30, 2016, Henry Hub prices were only slightlyhigher than the average price in 2012, so the changing cost of the natural gasfeedstock played no major part in the sharp decline of the landed cost of U.S.

LNG.Vessel charter rates and shipping fuel costs have droppedsubstantiallysince2012, lowering the delivered cost by an estimated $1.9 perMMBtu and $1.2 per MMBtu.

    SpainMajordeals in Spain U.S. LNG Plant Buyer company Contract Duration Capacity Buy Sale Price Cheniere Energy Gas Natural Fenosa 20 years 2 mmtpa Fixed Price ( $2.25-3.5/MMBtu) + liquefaction fee of $2.49/MMBtu + 115% of final Nymex Henry Hub Corpus Christi train 1 & 2 Iberdrola 20 years 0.4 mmtpa from Train 1 and increase upto 0.

8 mmtpa from Train 2 $5.6 billion (Est. deal price) Corpus Christi Endesa 20 years 2.25 mmtpa Fixed Price + Tolling Fees $3.

5/MMBtu + 115% of the Henry Hub  Why Spain looking atU.S LNG Ukraine crisis – The Ukraine crisis has spurred new interest in Europe finding alternatives to Russian natural gas imports. Spain is not exactly an energy powerhouse, but it could serve as a conduit to the rest of Europe for supplies of non-Russian natural gas.

Low production of gas – Its production of natural gas has been essentially nil for quite some time. Desperate to boost Spain’s moribund economy, Prime Minster Mariano Rajoy is hoping to change that, and has aggressively supported measures to allow the gas industry to begin exploration of Spain’s newfound potential shale gas reserves. Rajoy’s government is pushing hard to overturn bans on hydraulic fracking that have been issued by several provinces, including Cantabria, La Rioja, Navarra and Catalonia. Second largest importer of gas in Europe – Spain has six LNG import terminals already in operation. Its strategic geographic position on the Mediterranean allows it to get around half of its natural gas from its close neighbor, Algeria, and the rest from a variety of countries, including Nigeria, and Qatar.

Good natural gas infrastructure – Spain’s sophisticated natural gas infrastructure – the largest liquefaction capacity in Europe and a good distribution system – could allow Spain to come to Europe’s rescue, according to Sedigas, the country’s gas association. Weak interconnectivity with member states –         Spain is not well connected to France vianatural gas pipelines, which means it can’t supply the rest of Europe withre-gasified LNG. Spain a gas importcapacity of some 87 Bcm/year despite only having consumption of some 30Bcm/year. Its import capacity is more than eight times higher than its currentexport capacity to France and Portugal of just 10.6 Bcm/year. –         Spain imported gas from France almostevery day in 2016 – although volumes came down since the start of the year fromaround 12 million cu m/d to around 2 million cu m/d – so it is clear that thereis limited opportunity for Spain to move US LNG further into Europe. FranceMajordeals in France U.S.

LNG plant Buyer company Contract duration Capacity Buy Sale Price Import LNG terminal Cheniere Corpus Christi Engie S.A 5 years 222 mn MMBtu Linked to Northern European indexes Montoir-de-Bretagne terminal Corpus Christi train 2 and 3 EDF 20 years 0.38 & 0.39 mmtpa from train 2 & 3 respectively Linked to Title Transfer Facility (TTF), Netherlands EDF Dunkirk terminal Cheniere’s 5th train Total S.

A 20 years 2.0 mmtpa $2.3 billion EDF Dunkirk terminal  WhyFrance looking at US LNG Cold Weather Condition – Consumers cranked up their heaters as cold weather hit the region, pushing up demand for gas Reduction in Algerian Gas Supplies – As demand for gas has risen due to cold weather condition, supply from Algeria has been reduced due to problems at Sonatrach’s Skikda LNG export terminal Shutdown of French nuclear plants – The shutdown of some French nuclear plants as a consequence of the discovery of forged manufacturing documents for some parts used in those plants has also fired up demand for power from the region’s gas-fired plants higher than normal Largest importer of gas – France produces about 1% of the gas it consumes, and almost all gas consumed in France is imported. France’s total natural gas imports are relatively well diversified with significant imports from Norway, The Netherlands, Russia and Algeria. About 72% of the entry capacity to the French gas network is for cross-border gas pipelines, and the remaining entry Capacity (about 28%) is for gas from France’s four existing LNG import terminals Advantage of gas prices – Gas prices in Europe are at their highest premiums to U.S. gas prices for three years. Several cargoes have already made their way to Europe.

Prices at southern France’s Trading Region South (TRS) gas hub jumped to (Q4, 2016) 45 euros per megawatt hour, or over $14 per million British thermal units (mmBtu), making TRS one of the world’s premium markets and gas prices at the Henry Hub GT-HH-IDX benchmark in Louisiana traded around $3.25 per mmBtu Granted full exemption to Dunkerque LNG terminal for third-party access – The European Commission granted the Dunkerque terminal a full exemption from third-party access for 20 years. The plant’s capacity is contracted by EDF (60%) and Total.  EDF has contracted with Cheniere Energy to supply LNG from its Sabine Pass liquefaction complex in the US Supply Security and Diversification Need – U.S. LNG will help diversify the origin of gas consumed in France, according to Engie On the other hand, U.S.

LNG not only giving France a new option for gas supplies but also helping in strengthening its independent supply security Reducing the dominance of Russian natural gas supply –France is trying to reduce their reliance on Russian natural gas, which is shipped via pipeline without being liquefied UnitedKingdomMajordeals in United Kingdom U.S. LNG Plant Buyer company Contract Duration Capacity Buy Sale Price Cheniere Energy BG group 20 years 3.

5 MTPA 115% of Henry Hub Price + $2.25 premium Cheniere Energy Centrica 20 years 1.75 MTPA $5.5 billion (Est. deal price)  Why U.K. looking at U.

SLNG Biggest consumer of gas – The U.K., the biggest gas consumer in Europe after Germany, relies on imports for about two-thirds of what it needs. Norwegian pipeline gas dominates Britain’s gas imports, followed by liquefied natural gas. More than 90 percent of the LNG comes from Qatar, the biggest of the world’s 19 exporters of the fuel, with the rest from nations including Norway, Algeria and Trinidad & Tobago. Low domestic production – Imports may become even more important for the U.K.

, since domestic production in the North Sea is on the decline. Expansion of Panama Canal – The expansion of the Panama Canal allowing it to be used by standard LNG tankers (since June 2016) means Peru’s shipping distance to Britain is now comparable to Qatar’s. The most convenient destination for Peruvian LNG is nearby Latin America and its biggest market has been Mexico but now Peru LNG stopped shipments to Mexico which makes way for imports to UK. Supply Security – US LNG helps UK in continuous supply of gas and in strengthening its independent supply security. Qatar crises fuels to rising UK imports –         Britain’s increasing reliance on energyimports as the North Sea’s oil and gas wealth declines has been highlighted bythe diplomatic crisis engulfing Qatar. Qatar’s transport links were severed bySaudi Arabia, the United Arab Emirates, Egypt and several other countries overDoha’s alleged funding of extremist groups. –         Ports, including refuelling hub Fujairahin the UAE, have been closed to Qatari-flagged ships raising concerns over costhikes and delays to shipments. All these created a huge problem for UK as itsone-third energy needs are fulfilled by Qatar but now they have to look foranother options for their energy needs.



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