By Mark Young, Evaluate Energy It has been well documented over the past few years that the vast quantities of shale gas suddenly being produced in the US has caused a sharp fall in the benchmark gas prices domestically. In the main, E&P companies have reacted to this by moving towards oilier projects to attain greater margins for their efforts, and the upstream gas industry has begun to falter. However, an LNG supply deal that was signed in late 2011 between Cheniere Energy and India’s GAIL hit the headlines again last week, in fact showing just how beneficial this glut of gas and low price could prove to be for the US. Evaluate Energy argues that the downturn may have actually placed the US and the companies involved in a very strong position on the global LNG stage, as current prices in other countries begin to look too high. Ironically, it is the low US benchmark gas price – a constant annoyance to US E&P companies for a reasonably long time now – that makes this deal such a potential success story. Cheniere Energy agreed to export 3.5 million tonnes per annum (mtpa) to GAIL from its Sabine Pass Terminal in Louisiana for 20 years, following the terminal beginning LNG production in 2016-2017. The price of the deal is linked to the US benchmark gas price, with a fixed component added on. At current prices, GAIL will be importing gas at the lowest contracted price in India’s history, $10.50 per million British thermal units (MMbtu), according to various media reports last week. Considering some of the spot LNG import prices seen in Asia over the last few years, this may seem quite a low price for Cheniere to be selling at, but overall it could end up reaping huge rewards for the US, as perhaps the greatest implication of this deal is that not only are spot prices now looking too expensive, but so too are other gas exporting countries’ sales agreements already in place. One example of this can be seen in Australia. Almost simultaneously to the $10.50 imports making the headlines, GAIL was reportedly in talks with its affiliate Petronet LNG over an existing agreement with ExxonMobil (XOM) for imports from the Gorgon project, set to begin in 2015. The crucial factor in comparing this deal with the Cheniere agreement is that the Gorgon deal links to benchmark oil prices, not gas; various reports claimed that if oil is at US $100 – a level around which it has been for some time – Petronet will pay $14.50/MMbtu to import. On the back of the cheaper agreement from the US, GAIL is pushing Petronet to renegotiate this comparatively expensive deal, which could in turn potentially add to the turmoil that Australia’s LNG sector has been going through of late, which include terminals changing ownership mid-construction, skilled labour shortages and rapidly rising construction/installation costs. The low US gas price was already making the country look a very attractive gas source for hungry Asian nations and GAIL’s landmark agreement is now explicitly showcasing the possibilities, should the US be able to sustain a market for LNG exports at similarly cheaper prices, long-term. If this proves not to be an isolated case but a long-term situation, it will not only be the Gorgon project or other terminals in Australia that could potentially be affected. Mozambique’s Rovuma basin has been the host of numerous huge gas discoveries in the last 18 months, with the more prominent partners, Eni, and Anadarko Petroleum (APC), both mooting the possibility of LNG exports. This deep offshore gas may well prove costly to extract and in turn generate high prices, at least to begin with, and a lower alternative import price from the US may cause end markets to disappear and could hamper development as a consequence. Russia is another country looking to supply Asian countries with gas from new LNG projects. Russia, a country notorious for high export charges, maybe sees this avenue as a potential safeguard against future losses that could be caused by European countries moving away from Gazprom’s supply in the near future as contracts come up for renewal, Azeri gas beginning to flow to the continent via TAP, and shale gas development continuing. Australia, Russia and Mozambique are all countries looking to move into or expand their small presence in LNG that could have to lower prices/expectations to compete with the US at these price levels, but it may also affect more established players. Qatar, currently the world’s largest LNG exporting country, takes up a high number of spot supply deals, and one long-term deal currently in place with India, for instance, is 7.5mtpa at around $13/MMbtu according to media reports. If the US can build up and sustain wide-scale competition at these cheaper levels, it could impact prices everywhere. Over the past few years, Asian companies have been taking minority stakes in various LNG projects around the world in an attempt to mitigate the effect of seemingly inevitable high import costs in long-term deals. But now, thanks to the US price remaining relatively low and this Cheniere/GAIL agreement appearing to bear fruit for both the importing and exporting party, do importing countries have a bargaining chip to drive down prices without having to actually join an export project? If other exporting countries cannot lower prices enough, and a few dollars can be shaved off here and there in these long-term contracts from the US, regardless of the much longer distances involved, why would anybody buy gas anywhere else? The gas exporting world may have to react quickly and lower prices to stop everyone flocking to the US for their gas. Otherwise, the low US gas price that has been harming US E&P companies for a long time will in fact be the very thing to turn fortunes around – After all, the many LNG export terminals sprouting up around the country will need supply of their own to fulfil the large demand. This one deal for 3.5mtpa over 20 years may not represent a particularly gigantic physical quantity of gas, and it is still a couple of years into the future, but the overarching implications of the deal could prove huge for both importing and exporting countries alike. US shale gas caused a dramatic fall in the US gas price, and perhaps this deal is an early signal that the impact is beginning to go global. This blog originally appeared on Evaluate Energy's website.