The price of coal in Europe will play a key role in determining the success of US LNG exports, according to a new study from Wood Mackenzie, which argues the picture is much more complex than the current focus on Russia suggests.
“With European LNG imports, including from the US, set to grow over the next five years, there is much speculation about Russia’s likely response,” explained Stephen O’Rourke, Research Director of Global Gas Supply for Wood Mackenzie. “Will Russia’s gas strategy mimic that of Saudi Arabia’s oil strategy, will it seek to retain market share in Europe, pushing European gas prices to levels that force the shut-in of US LNG exports?”
This focus on Russia, however, misses the bigger picture: “Our analysis shows that while Russia’s export strategy is important, ultimately US LNG export utilisation will be influenced more by the price of other commodities: of US gas, oil and, particularly, of coal, which will determine European spot prices through coal-gas switching in the power sector,” said Noel Tomnay, Head of Global Gas & LNG Research for Wood Mackenzie.
With the price of coal determining the European gas spot prices, the US LNG industry will be watching the coal market hard. Higher coal prices should be more positive for US LNG exports, which need a certain price level to remain profitable. Should the price of coal continue to fall, however, taking gas with it, the chances that large sections of US LNG capacity could be shut-in will increase.
At the other end of the process, were US gas prices to increase, the cost of US LNG production would go with them, requiring a higher spot price in Europe for LNG imports to be viable. The price of oil – to which the price of Russian contract gas exports is linked – will also play a key role with lower oil prices increasing Europe’s appetite to offtake Russian contract gas.
But it is the price of coal that could make or ruin US LNG’s day: “Average utilization of US LNG export capacity between 2017 – 2020 could vary from 54 – 100%,” concluded O’Rourke. “For US LNG exporters, the best thing to happen would be for global coal prices to rise or for US gas prices to stay low.”
Edited by Jonathan Rowland.