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Linked to Oil or the Henry Hub

February 19, 2013

In the past several years, the United States has been blessed with a huge supply of natural gas that has brought the price down from $13 per million BTU to around $3.00 per million BTU.

Natural gas in the United States has been priced based on supply and demand in North America, while the rest of the world, which has either rejected fracking or lacked the necessary skill to extract natural gas from shale, has established a world market for natural gas where the price for natural gas is linked to the price of oil.

While the price of natural gas in Asia may be around $15.00 per million BTU, the price in the United States, for the foreseeable future, providing the government doesn’t severely restrict fracking, is likely to remain somewhere near $3 to $4.

The disparity between the world market price and the price in the United States is large, around $12.00 per million BTU.

This disparity has prompted an effort to export liquefied natural gas from the United States and Canada. Even after taking into consideration the cost of liquefying and transporting natural gas from North America to Asia, there is the potential to earn a large profit.

But what happens if Asian customers want to buy natural gas based on the Henry Hub price? The Henry Hub is where prices are set in the United States.

This is what is happening today: Asian customers are saying they want to buy based on the U.S. price.

Chevron, for one, has said that the necessary LNG facilities and terminals won’t be built if Asian customers insist on linking the price to the Henry Hub. John Watson, Chevron CEO, said, “I can tell you it takes a large capital commitment and most companies in the world aren’t going to make that commitment without having  pricing that gives them a fair return, and that pricing is going to need to be something close to oil parity.”

Chevron has recently joined the group that is planning on building LNG facilities in Kitimat, Canada.

It also has invested in the huge Gorgon plant off the Northwest coast of Australia, so any pressure to link the price of natural gas to the U.S. market price could threaten their investment in the Gorgon project.

In addition, LNG from the Mideast is linked to the price of oil, including exports to Europe.

Russia has a vested interest in keeping the price linked to oil, since they are one of the largest suppliers of natural gas to Europe. The income from natural gas is hugely important to Russian coffers. This is one reason why Russia has been attempting to discourage Europe from developing fracking.

It’s doubtful that suppliers of LNG from North America will agree to sell at the price wanted by Asian customers: It would undercut not only North American investments, but also other large investments being made in Australia and the Mideast.

Fracking in the United States has reverberated around the world, and could potentially affect the world market for natural gas. If China and Europe can develop natural gas supplies by using fracking technologies, the entire world could benefit from lower prices. In the meantime, large investments are being made in LNG facilities to serve Asia and Europe.

Until the world develops fracking, it would be wrong to sell our natural gas based on the Henry Hub price.

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