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Natural Gas: U.S. Becoming Natural Gas Exporter?

by Bob Shively, Enerdynamics President

Just three years ago, the overwhelming consensus was that U.S. and Canadian natural gas supplies were dwindling and growing demand would overwhelm supply, thus resulting in long-term high prices. Developers seeking to take advantage of the next big infrastructure boom rushed to get LNG import terminals in place in the U.S., Canada and northern Mexico. And it was assumed North America would soon join global gas markets and compete for supply with growing European and Asian consumers much like today’s global oil marketplace in which the U.S. imports more than 60% of its petroleum supply.

Fast forward to 2011. The shale gas boom coupled with falling industrial demand during the great recession has turned the North American gas marketplace on its head. By the end of 2009, U.S. gas reserves had increased by 19% in two years. And Secretary of Energy Stephen Chu stated in April of 2010 that we may ultimately see doubled reserves. Even though recent gas demand has risen thanks to power plant demands and improved industrial output, prices continue to drop. The December 2010 month-ahead Henry Hub price of $4.27/MMBtu was 67% lower than its 2008 summer peak of $13.11/MMBtu.

Compared to other global markets, natural gas in the U.S. is cheap – December 2010 LNG spot prices in Europe were about $9/MMBtu, and in Asia were more than $11/MMBtu. Suddenly gas producers in the U.S. see a new opportunity: Why not take some of the excess availability in the U.S. and export it to these higher priced markets? Indeed, with an approximate liquefaction cost of $2/MMBtu and transport costs of $1/MMBtu to Europe or $2/MMBtu to Asia this looks attractive. And, with removal of some of the supply onhand in North America, the benefits may go beyond profits on export transactions and also result in increased U.S. prices.

Since 1969, the U.S. has exported small volumes of LNG to Japan (from the Alaskan Kenai facility) and volumes by pipeline to Mexico. Might the U.S. begin exporting more significant volumes to world markets? Current market activities suggest the answer is yes. A number of market players are moving forward with preliminary actions to develop such capabilities. Numerous international companies active in LNG recently have invested in joint venture projects in U.S. shale plays. Such investments may be partly driven by companies’ need to learn more about shale gas in hopes of developing such reserves elsewhere. However, they may also be for the purpose of developing ways to access future U.S. supply for international markets.

The Department of Energy has granted permits to multiple existing LNG terminals looking to re-export LNG volumes sitting in their storage tanks, and, in the past year, cargos have been re-exported from the U.S. to Europe and Asia. Two existing terminals – Freeport in Texas and Sabine Pass in Louisiana – are moving forward with plans to convert their terminals to liquefy U.S. production for export as LNG. A similar project is proposed for new construction in British Columbia. Meanwhile, the current project to widen the Panama Canal will, by 2014, allow LNG tankers from the Gulf of Mexico to pass from the Atlantic to the Pacific Ocean thus accessing Asian markets and the more natural European markets. And a number of countries in the Caribbean and South America are interested in replacing more costly oil-fired electric generation with gas-fired generation fueled by LNG imports.

So what does this all mean? Not much in the immediate future as export infrastructure will take a number of years to develop. But, by 2015 or 2016 we could see North American natural gas supplies begin to compete in world markets. This might once again shift our paradigm of how natural gas is priced and how large the potential market is for North American production.

North American LNG Facilities Proposing to Add Export Capability:

Freeport LNG, Texas Freeport LNG and Macquarie Energy joint venture to add liquefaction capabilities to existing terminal with 2015 start date for exporting. Current focus appears to be on Asian markets.
Sabine Pass LNG, Louisiana Cheniere Energy Partners (owner of Sabine Pass LNG) is moving forward with preliminary plans to add liquefaction capabilities to existing terminal with planed 2015 start date for exporting. Cheniere has signed provisional agreements with multiple potential partners including entities in the U.S., Europe and Asia. Cheniere is also exploring exports to the Caribbean.
Kitmat LNG, British Columbia Proposed LNG import terminal project has been reconfigured as a proposed export project.  U.S. producer Apache has signed agreement for 51% ownership and other project participants include Korea Gas. Project is focused on Asian markets.

International Joint Venture Partners Active in U.S. Shale Gas:

BP (U.K.)

Statoil (Norway)

Eni (Italy)

BG (U.K.)

Sumitomo (Japan)

Total (France)

Mitsui (Japan)

KoGas (South Korea)

Reliance Industries (India)

Itochu (Japan)

CNOOC (China)

Gas prices around the globe:
All data are annual averages reported in BP Statistical Review of World Energy 2010 except for 2010 data, which represents spot prices as of Dec. 13th.

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