Another Boom? The impact of LNG exports on domestic gas prices

With LNG Canada moving closer toward start-up, there are more and more discussion about its potential market impacts. The plant will divert about 11% of Canadian domestic gas production into LNG markets, about the same domestic market share that US LNG projects currently hold (for more details see the last blog post, Will Canadian LNG move markets?). Three cases may provide some insights. The conclusion - watch the Y-day market!

NOTE: This article is for general information purposes only. Whilst this article talks about market impacts, this is not business, legal, or investment advice, and all information remains subject to change.

Case 1: Netback impacts - Queensland LNG

Queensland, Australia, has seen significant growth of gas production and LNG exports over the last two decades. Three large plants currently export LNG: Shell-operated Queensland Curtis LNG (8.5 mtpa), Santos-operated Gladstone LNG (7.8 mtpa) , and Australia Pacific LNG led by Conoco-Phillips (9mtpa). Total nameplate capacity of 25.3 mtpa is thus about 80% larger than LNG Canada’s first phase 14 mtpa. Yet the Queensland domestic gas market, which has only limited pipeline interconnections with neighboring domestic markets, is smaller than Canada’s. In 2021, LNG exports represented over 80% of Queensland natural gas production (Statista - Australia Natural Gas Production by State).   

Domestic gas prices went from between 4-6 AUD/GJ in 2011-2014 to over 15 AUD/GJ in 2021-2023, as international LNG prices skyrocketed and netbacks drove up domestic prices (Australian Energy Regulator - Oil & Gas Price History). Given the smaller relative LNG market share, deeper domestic gas market, and more scalable upstream production, this kind of significant impact on domestic gas prices is rather unlikely in Canada.

Case 2: Temporary market impacts - Freeport LNG explosion

On June 8, 2023, an explosion occurred at the Freeport LNG plant in Texas, removing 2 Bcf/d of export capacity from the US gas market for about 8 months. This “tanked surging domestic prices and helped enable storage inventories to refill ahead of the winter” (S&P Global - US LNG Plant Outage). In the immediate aftermath, European LNG spot prices increased by 9%, whereas Henry Hub prices fell by 6% (CNN - US LNG Plant Explosion). And any time news or rumors around Freeport’s restart came up, Henry Hub prices moved by similar amounts (Capital.com - Freeport LNG Reopening). Freeport’s absolute size is about equivalent to LNG Canada’s, albeit in a domestic gas market that is almost 6 times bigger. 

Case 3: AECO impacts - 2023 Duvernay wildfires

The severe wildfires in Alberta in May 2023 led to temporary production shut-ins mainly in the Duvernay. For some days, up to 2.5 Bcf/d were offline (S&P Global - Canadian Gas Production Slumps). Monthly average prices hardly moved, with the impact being below CAD 1/GJ (Oilsands Magazine - Oil & Gas Prices). Intraday swings were larger, but the biggest impact was on the “Yesterday’s (Y’day) market”, where market participants settle imbalances related to the previous trading day. In a nutshell, Y-day balances market participants’ positions with actual flows: for example, if a party bought 1Bcf of gas but due to a demand interruption could use only 0.6Bcf, that party is long 0.4Bcf for that day. To get back into balance, they have to put the gas into storage, sell it intra-day, or offload it in the y-day market. As y-day liquidity on most days is below 1Bcf, large imbalances can swing this market significantly - and during the forest fires, double digit positive and negative prices were seen. 

Takeaways

Thus what does this all mean? “It depends” - on a lot of factors. One hypothesis - higher impact on volatility than on average prices:

• Monthly average prices could increase following start-up in line with similar-sized supply-disruptions in the past, but revert lower again within 12-24 months as new upstream production comes online. Interestingly, the AECO forward-curve (Gas Alberta - Market Prices) as of today shows summer 2025 trading CAD 0.7-.8/GJ above summer 2024, and summer 2027 about 20 cents below 2025 levels - it appears as if traders assume this scenario with an LNGC start-up in early 2025.

• Daily prices could be more volatile during the ramp-up period and during unplanned outages / trips, but not too different from previous significant events like wildfires.

• Y-day volatility may peak, and might reach negative price levels not previously observed should market participants not be able to re-balance their positions in a timely manner during unplanned interruptions.

It may look like the “head in the oven, feet in the freezer, and on average you are comfortably warm” story. Either way, it will be a very interesting time for market observers, and especially for traders.

Coming next time - Predictions are hard, especially about the future!

LNG Training

If you are interested in deepening your understanding of LNG markets and value chains, please consider Arder Energy’s customizable training. We also just published the introductory modules as a standalone “LNG 101” training course via the Udemy platform for flexible, time- and cost-efficient learning.