For A Million BTU

The price differential for a million btu is blowing out once again, between Global oil and North American natural gas. The extraordinary discount has persisted for some years. But today, with West Texas Intermediate (WTIC) oil above $100 and Brent oil above $110, the spread has reached new highs. The energy content of natural gas is trading at an 83% discount to WTIC Oil, and at an 85% discount to Brent oil. An economist might be persuaded to say: “That is a gap that must eventually close. Or, at the very least, which gives North American energy markets a huge, competitive advantage to source cheap, domestic btu compared to the rest of the world.” I would not disagree. However, the infrastructure problems associated with energy transition do not make such switching from expensive oil to cheap natural gas an easy, or rapid, endeavor. I address these issues continually, but a post of mine from last year, Vexed By Natural Gas, might be worth a read for those who want to ponder the situation further.

As you study the chart below, consider for a moment a less well advertised price spread: the disparity between North American natural gas (which remains landlocked) and the price for landed LNG in the United Kingdom. As energy market observers already know, North American natural gas will—in the next couple of years—be released through LNG export terminals in British Columbia (Kitimat) and Louisiana (Sabine Pass). That will trigger a rather momentous price convergence globally, as world LNG prices adjust to the entry of North American volumes.

–Gregor

  • http://www.facebook.com/people/Don-Westlund/1749478547 Don Westlund

    What kind of volumes would you expect to see exported from Kitimat and Sabine Pass?  I would expect Sabine Pass to come online first but we are still talking around 2014 before any gas will be exported at the earliest.

    Thanks
    Don

  • Anonymous

    LNG is not “free”. There will be a price convergence, but nowhere near a complete convergence. Gas will always be cheaper on one side of the LNG compression/decompression process. 

    So the US will likely enjoy cheap natural gas for multiple decades to come. There will always be a price spread between Henry Hub and UK LNG (or at least as long as the US remains such a dominant producer of gas).

    That said, the prices will converge, that’s for sure. All of them, Henry Hub, Brent Crude, and UK LNG. They will be closer 5-10 years from now as the market adjusts. But gas will still be a very competitive choice for domestic electrical production for multiple decades. The combination of shale gas and modern gas generators is too powerful, and LNG is too spendy to fully internationalize the price.

  • Anonymous

    Natural gas burns so cleanly that with synthetic oil, an engine might last 500,000 miles.

  • Anonymous

    Check out the size of the shallow Russian Arctic Continental Shelf on Google Earth. Note the 3 big rivers that have been depositing organic material into that ocean for many millions of years. Guess what is probably down there. Too bad mobsters run the place. 

  • http://www.visiblecountry.com/blog/ SRBAC

    Haven’t the adjustments already begun?