The abundance of liquefied natural gas (LNG) supplies made possible by unconventional technology is so great that the U.S. is destined to become a prolific exporter of the fuel. Sound familiar?

While this theory has become a mantra for many in the oil and gas business, Kenneth Medlock, a fellow at Rice University’s Baker Institute in Houston, is not joining the sure-thing theorists. Amid all of the exaltations for exportation, Medlock contends that some complications exist.

In other words, borrowing a line from a Louis Armstrong standard, the bucket’s got a hole in it.

Medlock takes exception to the formulaic approach taken by groups such as the U.S. Energy Information Administration, the Deloitte Center for Energy Solutions and RBAC Inc., all of which have studied the impact of U.S. exports on domestic prices. Considering the title of Medlock’s report, “U.S. LNG Exports: Truth And Consequence,” it is clear that he is not trying to blend in with the choir.

“To separate truth from fiction, one must apply the appropriate analytic framework grounded in international trade. Specifically, domestic market interactions with the market abroad will determine export volumes and therefore U.S. domestic price impacts,” Medlock says.

The aforementioned studies, he theorizes, assume a particular volume of LNG exports from the U.S. when assessing the domestic impact; however, they do not factor in interaction between domestic and international markets. U.S. LNG exports will occur in a global setting, so Medlock says the subject becomes an international trade issue.

Note the emphasis on international.

“We must not only consider what is happening in North America; we must also consider what is happening abroad. For one, the emergence of shale gas in the U.S. has already had an impact on natural gas markets in Europe and Asia,” Medlock says. “LNG supplies, whose development was anchored to the belief that the U.S. would be a premium market, have been diverted to European and Asian buyers.”

He continues, “This has presented consumers in Europe with an alternative to Russian and North African pipeline supplies, and it is exerting pressure on the status quo of indexing gas sales to the price of petroleum products. In fact, Russia has already accepted lower prices for its natural gas markets, or regional market hubs, rather than oil prices.”

For producers, here’s the revelation regarding Medlock’s report: The impact on U.S. domestic prices will not be large if exports are allowed, and the long-term volume of U.S. exports is not likely to be large, either. He adds, “The bottom line is that certification of LNG exports will not likely produce a large domestic price impact, although the entities involved may be exposed to significant commercial risk.”

That’s not exactly a sterling endorsement of future LNG exports.

Several critical factors determine the impact of LNG exports on domestic prices and whether or not LNG exports will actually occur, according to Medlock. He cites the elasticity of domestic supply; the elasticity of foreign supply; the role of short-term capacity constraints; the cost of developing and utilizing export capacity; and the value of the U.S. dollar, which Medlock contends is “an often-ignored issue in this context.”

Medlock goes on to hammer home four factors that he thinks will have major implications for U.S. LNG exports:

First, longer-term shale developments in places such as China, India, Australia and several European countries will become commercially attractive at prices in excess of $7 per thousand cubic feet.

Second, the development of pipeline supplies from Russia, Central Asia, South Asia and China will displace the need for LNG.

Third, movement in exchange rates will affect dollar-dominated supplies abroad. For example, if the U.S. dollar strengthens relative to its recent historical lows against major traded currencies, the evaluation of dollar-dominated arbitrage opportunities will change.

Finally, growth in competition will bring increased liquidity and a movement away from the traditional pricing paradigm of long-term oil-linked contracts. “Importantly, there is no guarantee that movement away from oil indexation will result in natural gas prices falling longer term relative to crude oil. Rather, a lack of oil indexation should only mean that gas will be priced according to marginal cost.”

Obviously, Medlock’s theory is just one in a world of opinion. Yet, it is cosmopolitan enough to warrant investors’ broad consideration.