North America's Natural Gas Binge: Canada-U.S. Natural Gas Race Is On--But New York-Based Nymex Is the Clear Winner

By Keith Edmund White
Editor-in-Chief

The United States and Canada seem to be racing to see who can export more natural gas—particularly liquefied natural gas (LNG)—to Asia first.  CBC reports on the five natural gas plant projects in B.C. up and running, and then exporting to Asia.  Of particular note:  these projects  aren’t getting the opposition faced by plans for a B.C. Northern Gateway pipeline—which, according to a Globe and Mail article yesterday, is opposed by 60% of B.C. residents. 

(For fans of regulatory news:  check out this elegant breakdown of Canada's regulation of natural gas on pages 4-6 of a 2010 Natural Resources Canada presentation.)

And Risk.net reports on U.S. firms developing natural gas projects:

There are currently more than half a dozen projects to build LNG export terminals in the US, which are in various stages of the regulatory approval process. The one that appears to be furthest along – Cheniere Energy's proposed $5 billion LNG facility in Sabine Pass, Louisiana – is scheduled to begin exporting cargoes in late 2015 or early 2016, according to the company.

There are two drivers for the North American gas rush according to Risk.net:

(1) Price. Natural gas is much cheaper in North America than Asia, by a lot:

“…the price of the Henry Hub front-month contract has dropped from more than $13 per million British thermal units (/MMBtu) in 2008 to less than $3/MMBtu today. By comparison, spot natural gas prices in Japan were as high as $18/MMBtu earlier this year. “

(2) Simplified natural gas international marketplace. While the international trade of natural gas has been hampered by the lack of one market for natural gas (for a backgrounder, check out this previous CUSLI-Nexus posting). But Risk.net contends that the NY is now becoming the global place to trade futures contracts on natural gas, lower barriers for Canadian and U.S. exporters. The one big exception: China.

From the Risk.net article:

"Given the growth in LNG, and the creation of an international market in natural gas, we assume that the oil price link will gradually have less importance," the analysts from Citi write. "Instead, we see Europe as sourcing its natural gas in the international market, with the long-term driver of natural gas prices in Europe being the Henry Hub benchmark."

…

Similarly, Henry Hub pricing will become more prevalent in Asia, the Citi report said. "In Asia (excluding China), the key markets of Japan and South Korea are dependent on LNG imports, and so already purchase natural gas on the international market. Again, we see the long-term driver of this market as being the Henry Hub benchmark," the report says, adding that Chinese natural gas prices will be less linked to Henry Hub because China will eventually tap its own abundant shale gas reserves.

…

Henry Hub is named after a pipeline interconnection point in Louisiana that serves as the physical delivery location for natural gas futures contracts traded on Nymex, the New York-based commodities exchange owned by CME Group.

Two interesting—albeit tentative—conclusions can be drawn from looking at these two articles.  First, the Canada-U.S. energy relationship is complex:  Canada is America’s #1 source of foreign oil, but a U.S. competitor when it comes to the emerging natural gas market.  Second, regardless of what nations certain natural gas producer firms are based in, the U.S.-based Nymex commodities exchange looks like the big winner of North America’s natural gas binge.  In fact, Nymex—as reported by Bloomberg Businessweek—earlier this month launched “a broad suite of new natural gas and power markets.”