Considering India’s limited gas reserves and rising demand for energy, India would require access to overseas energy sources to meet its needs. In view of the recent developments – around establishment of abundant shale gas resources and plans to develop a number of LNG export terminals, US is emerging as a favorable source for LNG exports. The boom in shale gas production is expected to result in a large surplus situation in US leading to opportunities for LNG export. This has generated lot of interest among Asian companies to source LNG or book capacities from these terminals.
With regard to developments in US, a number of LNG terminals aggregating to a capacity to the tune of 185 mtpa are seeking regulatory approval from the US Government for exports. Though a number of such applicants have secured permission to export to countries with which US has Free Trade Agreements (FTAs), the demand there is low. As a result, most of the applicants have applied for exports to non-FTA countries, such as India. After Cheniere terminal received US Government permit to export gas to non-FTA countries, Department of Energy (DoE) has commissioned a study to assess the impact of exports on domestic energy consumption, production and prices. This study is likely to be completed by December 2012 and further approvals are expected only after assessment of the study is completed.
LNG exports would provide valuable foreign exchange and would be a source of economic growth and job creation in US. Moreover, restricting exports would weaken the position of the US as a supporter of a global trading system characterized by the free flow of goods and capital. As US has been a major importer of hydrocarbon resources from all over the world, it should not be seen as a hoarder when it comes to export part of the resources which have now become exploitable due to advancement of technology.
We expect that US Government will be supportive of LNG export to non-FTA countries. Alternatively, India can pitch for a special status for export of LNG from US despite India being a non-FTA country.
Though the Henry Hub linked LNG pricing regime for exports from US is attractive, there is a potential risk in terms of huge financial exposure for buyers as DOE has reserved a right to rescind non-FTA export authorizations if deemed fit. As the project developers are now reluctant to consider this as a Force Majeure, the buyers would have to bear large risk exposure not only under the LNG offtake / liquefaction capacity booking contracts but also under upstream, shipping, regasification and downstream marketing contracts. In this regard, clarity is required around on the various circumstances which could trigger revocation of an authorization.