Implications of North American LNG Exports for Asia's Pricing Regime

EXECUTIVE SUMMARY

MAIN FINDINGS

As supply options in the traditional East of Suez region become more limited due to declining reserves
and increasing domestic consumption, Asian buyers have expanded their horizons to new LNG-exports
provinces such as North America and East Africa. North America has become especially intriguing as
Asian buyers have taken stakes in oil and gas fields—particularly in Canada—and view North American
supply as potentially cheaper than traditional supply options that are linked to oil. Given the cost structure
of Canadian and U.S. projects, it is very likely that Canadian-sourced LNG will have to be largely, if not
fully, linked to oil, whereas U.S. LNG exports will be linked to Henry Hub. High project costs for new
plants, coupled with long-term LNG contracts that are currently in force, ensure that Asian LNG pricing
will remain predominantly linked to oil for the foreseeable future, even when accounting for North
American exports. While many buyers now seek hub-related pricing, some are under the impression that
this price differential will last indefinitely and guarantee lower prices. FACTS Global Energy believes
that the impact of U.S. LNG exports on Asian prices will be marginal. However, Asian buyers will look
to add U.S. LNG into their portfolio as a price-diversification and supply-security strategy. In addition,
U.S. LNG offers greater off-take flexibility as well as a negotiating tool when dealing with traditional
exporters in the East.

POLICY IMPLICATIONS

• In order to increase price and supply diversification and off-take flexibility, Asian buyers such as
Japan that do not have free trade agreements (FTA) with the U.S. will press the U.S. government
to allow non-FTA export licenses.
• U.S. restrictions on LNG exports would violate WTO rules, whereas by allowing exports the U.S.
would increase trade balances and create jobs while having a marginal impact on the domestic
price.
• British Columbia’s proximity to the lucrative Asian market will give that province a
transportation advantage over U.S. Gulf Coast projects. Yet with the window of opportunity
closing, Canadian projects need to make final investment decisions in the next couple of years to
capitalize on Asian LNG demand, which could be filled by other competing projects.

Shahriar Fesharaki is Principal Consultant and Chief Operating Officer at FACTS Global Energy (FGE). He has
spoken at numerous natural gas conferences as well as authored multiple reports and studies on the Asia-Pacific
LNG market.

This working paper was commissioned by the Asia Pacific Foundation of Canada (APF Canada) and The
National Bureau of Asian Research (NBR) for the 2013 Pacific Energy Summit. The views in this paper
are those of the author and not necessarily those of APF Canada or NBR.