The North American Shale Gale has changed the US and Canadian natural gas markets, providing a long-term low-cost domestic fuel. Additionally, even without exporting a new drop of LNG, it has changed, is changing, and will continue to change global LNG and gas markets as well.

First, shale gas has already changed the global LNG market by displacing LNG which would have come to the North American shores. Qatar, the world's largest producer of LNG, had targeted North America for about one third of its supply, and Angola LNG, which commissioned last year, also targeted the US market when it took the final investment decision in late 2007. These volumes are no longer needed on American shores, and yet the market remains in a period of relatively high prices. Instead of triggering a massive oversupply, LNG has, relatively easily, found new homes. LNG prices would be much higher if those volumes from Qatar and Angola plus other volumes targeting North American shores-which had been predicted to rise to almost 9 Bcf per day by now--were not available for the global market.

The Shale Gale IS currently affecting markets by challenging the long-held tradition of pricing LNG off of oil (the so-called oil-linkage). The combination of the low cost gas from the Shale Gale and the ability to use existing infrastructure (LNG tanks, jetties, and pipelines) has lowered the costs of producing LNG. At the same time, LNG sold out of the US Gulf Coast is generally hub-linked, effectively sold on a cost-plus model, a mechanism which is expected to lead to lower prices. This is one key characteristic which led to a plethora of announced export projects and, importantly, long-term contracts to back them up. But the total amount of North American LNG proposed is unprecedented and unrealistic. Regardless, the mere fact that this liquefaction could be built has introduced considerable competition for incremental demand, and changed price expectations. The attachment of cost-plus pricing to so much new volume has changed expectations of what a fair level for LNG pricing is. With so much supply, the buyers have gained considerable control.

Although small compared to what has been proposed, considerable volumes of LNG will be exported from North America, negating the need for exports from other nations and providing some supply security through supply portfolio diversification. Sellers looking to develop their projects now have to compete more strongly, with more competitive pricing-either through the inclusion of hub-indexation or from lower slopes-stronger competition is essential in order to win offtake contracts. The vast amount of liquefaction potential, borne on the back of the Shale Gale, will remain in place, meaning that the price pressure will also remain.

The Shale Gale first redefined the North American natural gas cost curve. Now it's doing the same with global LNG.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.