Brexit Might Open a New Market Opportunity for U.S. LNG

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Researched by Industrial Info Resources (Sugar Land, Texas)--With the U.K. referendum on its European Union (EU) membership ending in a "Leave" vote, the global market is in flux across a multitude of sectors. Leaving the EU has innumerable repercussions for the U.K., including the loss of tariff-free trade with the other member countries. While the U.K. has considerable hydrocarbon resources in the North Sea, it still imports a large portion of its energy, especially in the form of natural gas.

Over 70% of those imports come via pipeline from neighboring countries, Belgium, The Netherlands, and Norway, while the remainder is brought in as liquefied natural gas (LNG) primarily from Qatar, with additional volumes from Algeria, Trinidad & Tobago and Nigeria, according to data from the U.K. government. The U.S. once shipped to the U.K., back in 2011, presumably from a re-export of natural gas from a then-recently-completed LNG import terminal; however, it has not shipped any more between then and 2015. With the U.K. leaning more heavily on its LNG imports in recent years, and its pipeline volumes soon to be subject to tariff pending its exit from the EU, does this mean the U.S. could find a market for its natural gas in its erstwhile imperial master, displacing piped-in or African-sourced natural gas?

The U.K. currently imports LNG via three terminals: The Isle of Grain, owned and operated by National Grid PLC (NYSE:NGG) (Warwick, England); South Hook, owned by a joint venture of state-owned Qatar Petroleum (Doha, Qatar) and Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas); and its neighboring Milford Haven import terminal, owned and operated by Dragon LNG, a joint venture between Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands) and Petronas (Kuala Lumpur, Malaysia). Of its total LNG imports in 2014, which represents roughly 27% of its total natural gas import volume, 92% came from Qatar, with the remaining 8% from Algeria, Trinidad & Tobago and Nigeria.

With Qatar's state-run ability to set its own price for natural gas, it is safe to say that the U.S. will not be able to displace the Arab nation's market share. However, with the potential for the U.K. to be subject to import tariffs on its pipeline volumes from EU member nations, as well as the political instability in Nigeria, it is possible that the U.S. may be price competitive in that sector of the U.K. gas demand market. Drawing on the fact that shipments from Trinidad & Tobago, which is relatively close to the U.S. Gulf Coast, are still commercially viable at that distance, then the market-linked pricing and transparency associated with U.S. LNG may incentivize British importers to take advantage of the U.S.' shale boom. For more information on the U.S.' competitive advantages in the world LNG market, see March 1 article, The Future of U.S. Energy Exports: Competing on Price and Transparency while Spurring Industrial Growth.

Additionally, given the 2-year time limit on the U.K. and EU reaching a settlement on exit terms, by the time the U.K. does successfully leave the EU, the Cove Point LNG export terminal project, owned by Dominion Resources Incorporated (NYSE:D) (Richmond, Virginia), is expected to be completed and running, presenting an even-closer export terminal for U.S. LNG to reach the U.K. market, further improving its competitive edge.

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