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North American Natural Gas is Fueling an International Political Power Shift

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June 10, 2012

(Dow Jones) KUALA LUMPUR–North American exports of natural gas threaten the dominance of gas exporting giants like Russia, Qatar and Algeria who currently control much of the world’s gas supplies.

First U.S. natural gas exports are still three years away, but it’s already creating a buzz. Rivals who dominate the business now are trying to play down the threat but they are already feeling the heat.

“They are all jittery,” Prabhat Singh, marketing director at India’s state-run Gail (India) Ltd. (532155.BY), told Dow Jones Newswires in an interview on the sidelines of a conference. Gail, India’s largest gas utility, is emerging as a major LNG buyer in the region.

Major exporters have traditionally wielded a commanding position in market, be it piped gas or liquefied natural gas. Some have displayed their clout by cutting off supplies. But this could be at risk if North America enters the market with its cheaper, Henry Hub-linked gas and there are signs it’s already happening.

“There used to be a tone full of arrogance earlier,” Mr. Singh said, referring to major exporters’ stance in price negotiations. “Now there is a tone which has mellowed down.”

U.S. gas production has surged over the past decade on the back of technology that allows extraction of gas from shale deposits. This has pushed U.S. gas prices to the lowest in a decade, opening up the possibility of shipping gas to Asia where prices are just short of record highs but demand is still robust.

Oil majors such as ExxonMobil and Royal Dutch Shell are exploring exports of natural gas from the U.S., which will require multi-billion dollar investments to produce and liquefy the gas that must be transported in specially designed tankers.

Gail has already signed a contract to buy LNG from Cheniere Energy‘s Sabine Pass facility in the U.S.–the first project to get all regulatory approvals. It now plans to use its portfolio of LNG supplies including the Henry Hub-linked cargoes as a yardstick for negotiating other deals.

“Today the scenario has changed,” Mr. Singh said. “The best thing is Henry Hub-linked gas prices are now coming to India,” which would give Indian buyers leverage while negotiating prices with other suppliers.

Over the last few years, Indian buyers have had to buy cargoes referenced to the relatively high price India paid for Gorgon LNG. Prices in Asia are often based on existing contracts due to the absence of a regional benchmark. Asian buyers pay a premium for LNG due to the vast difference between demand and supply, while prices are more volatile as they are linked to crude oil instead of gas, unlike in the U.S. or Europe.

The very idea of North American LNG exports entering the market has changed the mindset of Asian buyers, Mr. Singh said. And that is creating a headache for major LNG exporters that have or are making big-ticket investments in projects.

Speaking at a conference in Kuala Lumpur this week, Russian gas giant OAO Gazprom‘s Deputy Chief Executive Alexander Medvedev and Hamad Al Mohannadi, chief of Qatar’s RasGas, both played down the significance of North American exports.

Mr. Medvedev said he doesn’t consider unconventional gas from the U.S. as competition, while Mr. Mohannadi said volumes of North American LNG exports would be limited due to domestic demand.

Qatar is the world’s largest LNG exporter and Russia, which sells most of its gas through pipelines, is drawing up big plans for LNG exports to reach more customers.

Gazprom said this week that its ambitious Shtokman gas project in Arctic waters would now be turned into a full LNG project.

Mr. Singh said the posturing by the big exporters isn’t surprising. “If I were a major [exporter], what would I do? I have to tell the world that this is a mirage, don’t run after it. I have everything, buy expensive gas from me.”

-By Gurdeep Singh, Dow Jones Newswires

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