European and Asian gas prices have almost halved in 2014
EU price premium over North America down 77 pct this year
U.S. LNG export projects could struggle to sell overseas
Cold winters, unrest seen as possible upside price risks
By Henning Gloystein
LONDON, July 10 (Reuters) - A sharp fall in European and Asian gas prices this year will put liquefied natural gas (LNG) export projects worldwide under heavy cost pressure, and even kill some off, as expected returns on investments have to be revised down along with prices.
Benchmark British gas prices for delivery next month have almost halved this year as healthy supplies have been met by low demand following a mild winter and because overall gas use is dropping due to improving energy efficiency, rising competing fuels like renewables and low population growth.
Asian spot prices have also come off sharply this year, shedding over 40 percent in value as demand growth slowed and new supplies in the Pacific region became available, although prices remain almost twice as high as in Britain and around three times as expensive as in North America.
These price drops came despite ongoing gas disruption from Russia, the world's biggest gas exporter, to Europe via Ukraine, and as Japan still has its nuclear power plant fleet switched off following the Fukushima reactor meltdown in 2011.
If gas prices remain low, analysts say many of the large and costly planned liquefied natural gas (LNG) export projects around the world, including in North America and East Africa, will face trouble as initially budgeted returns on investment have to be revised downward.
"Gas projects are extremely price-sensitive because the margins are so thin … and only a small fraction of them (large LNG export projects) will get built," Royal Dutch Shell's director of projects and technology, Matthias Bichsel, said in June.
The Asian and European price drops also mean their premium over U.S. gas prices has fallen sharply, and if the trend lasts, could spell difficulty for some U.S. LNG export projects in selling their gas to the world profitably.
An unconventional gas production boom, including from underground shale, has led to a sharp fall in U.S. gas prices since 2008 to $3 to $5 per million British thermal units (mmBtu), equivalent to 17.5 to 30 pence per therm in British market terms.
French Bank Societe Generale said this week in a research note that it expected U.S. gas prices to range between $4 and $4.50 per mmBtu between 2014 and 2016.
At such cost levels, industry data show that U.S. LNG exporters would need a European price of 53 pence per therm ($9/mmBtu) to sell there at profit, and $10.65/ mmBtu for Asia.
With British prices down from over 70 pence a therm in January to around 36.50 pence ($6.25/mmBtu) in early July, Europe is now well out of the money for U.S. supplies, and with Asian prices down to $11 per mmBtu, this region is also on the brink of looking uncompetitive.
Increasing the price pressure is that analysts say U.S. prices will rise while Asian and European ones will drop if the United States begins LNG exports from late next year as planned as gas sucked out of America is added to supplies overseas.
"We're reviewing our previous cost and return projections and will also have to reduce production costs in order to compete in a lower priced gas environment," one source with a planned U.S. LNG export project said.
If, as planned, Japan restarts some of its nuclear power plants and the Ukraine crisis fades in Europe, Asian and European prices could fall further still.
FALLING EUROPEAN DEMAND
Behind Europe's falling gas prices lies a slow but steady slide in overall demand.
The International Energy Agency (IEA) estimates that European gas demand dropped by over 10 percent between 2008 and 2013, a trend that further accelerated this year following an unusually mild winter and spring, improving energy efficiency, as well as rising renewable and coal capacities eating into the share of gas for power generation.
"Electricity generation from gas is declining as gas plants are being squeezed out of the mix. The power sector, the former key driver for additional demand, is the possible key driver for demand decline in the 2010s and beyond," the Oxford Institute for Energy Studies said in a research report published in June.
The fall in gas use has so far outstripped dropping domestic North Sea production.
With pipeline and LNG imports also steady or ticking up in 2014, gas markets have become oversupplied, pulling down prices.
WILL CHEAP GAS LAST?
Although the overall price outlook for gas is bearish as the global market passes its peak tightness this year, there are still factors that could push prices up again.
Gas markets are highly weather sensitive, as seen in price spikes triggered by cold snaps in the United States last winter and in Britain the previous year. A long and cold European winter season 2014/2015 could push prices up over 50 percent and back towards levels seen last year, traders say.
Gas markets are also prone to political instability as seen in gas-rich North Africa since the outbreak of unrest there in 2011 or in the current Ukraine crisis that threatens to disrupt supplies to parts of Europe.
And, there is Europe's declining North Sea gas reserves.
Britain's gas production alone has fallen from 45.2 billion cubic metres (bcm) in 2011 to 36.5 bcm last year, and the decline is expected to continue steadily even if the country starts producing gas from shale. (Additional reporting by Oleg Vukmanovic, editing by David