Indian energy company GAIL is reportedly closing in on a deal to buy 2 million tonnes a year of LNG from Macquarie Group subsidiary Macquarie Energy.
Macquarie has sniffed an arbitrage opportunity between gas markets in the US - where prices have slumped due to an influx of shale gas supplies - and Asia, where demand has remained relatively robust. The company is developing a liquefaction terminal in Texas.
GAIL's Macquarie deal followed an earlier agreement the company struck with Cheniere Energy Partners under which GAIL will buy 3.5MMt a year from the Sabine Pass liquefaction terminal, which sits just up the road from Freeport.
Rather than follow the conventional LNG pricing method, which is linked to crude oil, both the Freeport and Sabine Pass contracts will reportedly be linked to the Henry Hub gas prices in the US. GAIL will expect that pricing system to deliver it a cheaper source of LNG than it could otherwise find through crude-linked prices out of places like Qatar and Australia, while Macquarie will obviously be expecting to pocket a healthy margin out of the deal.
Exporting LNG from the US was seen as an impossibility just a handful of years ago, but on the back of deals like GAIL's it is rapidly becoming a reality.
If projections are accurate, US LNG exports to Asia should become increasingly common primarily because no one sees much chance of US gas prices turning around any time soon.
Deutsche Bank has long been a believer in a long-term turnaround in US gas prices, but has relented to the current weak fundamentals and slashed its gas price forecast for 2012 from $US4.25 a unit to $US3.50 a unit.
UBS has taken a similarly bleak view of the US gas market. Its forecast for NYMEX gas prices in 2012 has been cut from $US4.50 a unit to just $US3.25 a unit.
The fall in US gas prices should be discouraging production growth, but ominously Energy Information Administration data showed an 8.3% year-on-year climb in gas production during October. UBS estimates around 100 gas rigs have been taken out of operation in the US as a result of falling gas prices, but the bank predicts another 100 will have to be taken out before production growth begins to moderate.
Should Deutsche and UBS's price projections prove accurate - and the banks aren't prone to making overly dramatic predictions - then the case for US gas producers (or other Macquarie-like opportunists) to convert their gas to LNG for export into Asia will not grow further.
To date, Australia's key rival for new LNG markets - Qatar - has proven to be very disciplined when it comes to negotiating gas deals. If it can't fetch a high price for its LNG, it won't bother selling it.
Given the country is swimming in more money than it needs, it can afford to hold out for top dollar on the LNG it chooses to produce.
The situation in the US is very different. Producers there have invested heavily in new production, only to see gas prices plummet. If they can fetch a few cents more by selling their gas as LNG than they would otherwise get in the domestic market, there will be a very real temptation to do so.
A sizeable, cheap and willing price undercutter is never a good thing for incumbent players, and the Australian LNG producers and developers looking to strike new offtake deals will view GAIL's US deals with a fair degree of nervousness.