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LNG industry eyes US gas developments FERC has granted export rights to Cheniere for up to 2.2 bcf per day of US-sourced liquefied natural gas to anywhere in the world Bill White Researcher/writer for the Office of the Federal Coordinator
The North American gas-price collapse caused by the shale-gas boom is simultaneously battering producers while exciting global buyers that some lower-cost liquefied natural gas might soon be available to them.
Those were take-away messages from the World LNG Americas Summit held April 25-26 in San Antonio.
Delegates from across the United States and around the world tried to make sense of what is occurring in the North American natural gas industry.
They were foreign buyers eager to send a message that they wanted gas — at the right price and other terms.
They were sellers touting the advantages of today’s low U.S. prices — while speculating hopefully that the advantages will remain for years.
They were consultants, analysts, executives at support firms, LNG terminal developers and others — eager to build business relationships and simply to learn more.
Casting an almost visible glow over the conference was an historic event that occurred just 10 days earlier: The Federal Energy Regulatory Commission granted permission for Cheniere Energy Inc. to build an LNG export plant at the company’s mostly idle LNG import site at Sabine Pass, La. Last year Cheniere received Department of Energy authority to ship anywhere in the world up to 2.2 billion cubic feet a day of LNG made from U.S. production — only a much smaller LNG plant at Nikiski, Alaska, has a similar export right. Cheniere now is working to borrow up to $4 billion to get the $10 billion project going, with the first LNG load intended to sail for market in late 2015 or early 2016.
Other LNG-export applications are pending with the U.S. and Canadian governments, totaling perhaps 17 bcf a day. But most panelists figured only 5 bcf to 6 bcf a day of North American LNG exports actually will begin in the next decade — enough to supply 15 to 20 percent of current world LNG demand.
With U.S. gas production growing faster than demand, prices have collapsed, trading in early May at about $2.30 per thousand cubic feet, the lowest sustained level since the 1990s. With Asian LNG prices of $14 to $16, and European prices of $9 to $12, entrepreneurs see opportunity to make money, even if it costs $5 to $6 to liquefy the U.S. methane and ship it overseas.
Buyers eager for North American exports “LNG from North America is one of the great possibilities,” said Atsushi Saiganji, a U.S.-based executive with Tokyo Gas Co.
Saiganji said Tokyo Gas bought about 530 bcf of natural gas last year and expects to want 775 bcf in 2020, with the extra gas needed mostly for power generation and industrial use.
LNG prices in Japan are linked to — and rise and fall with — oil prices. Japan consumers increasingly are restive for relief from today’s near-record high prices, he said. Because North American natural gas prices are unconnected to world oil prices, LNG exports from there could provide that price relief while also diversifying Tokyo Gas’ fuel supply.
To secure future supplies, Tokyo Gas has invested in British Columbia shale-gas plays and wants development of LNG exports from Canada’s west coast, Saiganji said.
Several speakers priced out North American LNG delivered at $8 to $10 per million Btu (about a thousand cubic feet) in Asia markets, factoring in today’s low price for U.S. gas — well below prevailing prices in Asia. Davis Thames, president of Cheniere Marketing, estimated that even if U.S. gas prices jump to $6, his company’s Sabine Pass LNG would cost $12.90 in Asia — a price that would be competitive there if oil prices are $86 a barrel or higher.
Shigeki Sakamoto, a senior researcher on LNG for Japan Oil, Gas and Metals National Corp., said that with little or no gas production of their own, and a growing demand for fossil fuels, Japan, South Korea and Taiwan crave stable, secure supplies of LNG. That desire supports the emergence of new suppliers, such as North America, East Africa and Australia, he said.
Australia is amid an LNG building binge. Its LNG market share in Japan is projected to grow from 18 percent last year to 43 percent in 2020. Australia’s inroads with South Korea should grow from a 2 percent market share last year to 40 percent in 2020, Sakamoto said.
Desire for high-Btu gas Both Sakamoto and Saiganji noted that most Japanese buyers want high-Btu gas — methane spiked with such gas liquids as propane, ethane and butane — rather than straight liquefied methane, which Cheniere plans to make at Sabine Pass. But if prices and other terms are right, the North American gas will find buyers that will spike the methane themselves if necessary.
One of the first companies to contract for Sabine Pass LNG is GAIL (India) Ltd. Prabhat Singh, marketing director for GAIL, also noted the interest of Indian gas buyers to purchase North American LNG to weaken the oil-linked prices that dominate Asia. GAIL committed to buying about 170 bcf annually for 20 years from Sabine Pass.
Singh said India’s appetite for natural gas is growing at 13 percent a year, which would cause consumption to triple in 10 years. GAIL bought a stake in the Eagle Ford shale play in southeast Texas last September and looks to spend $1 billion in shale-gas assets over the next year, mostly in the United States and Canada, he said. Other Indian firms have invested in Eagle Ford as well as the Marcellus play in the U.S. northeast.
Several speakers from South America — Argentina, Uruguay and Chile — also said they hope U.S. LNG exports will offer them lower prices as their growing economies expand demand for natural gas.
Christopher Goncalves, vice president of energy consultant Charles River Associates, predicted that current U.S. gas prices will rise, and current Asian LNG prices will fall, possibly in response to availability of U.S. gas on global markets. Even so, he said, he projected that the price spread between U.S. and Asia gas prices will shrink to perhaps $5 to $10 — still enough to support North American LNG exports after adding liquefaction and shipping costs. (Goncalves cautioned his forecast could go awry if he’s wrong about the strength of Asian demand growth, how much nuclear power will restart in Japan after that nation’s Fukushima tsunami disaster last year, when new Australian LNG plants start up as well as many other variables.)
Will global prices really change? A couple of speakers doused cold water on the conference’s love fest for North American LNG exports.
Yes, North American LNG could put a lower-cost supply on the global market.
Yes, it’s interesting that Sabine Pass LNG customers include BG Group, a gas trader, and that other gas traders are tip-toeing into the business. Traders take shiploads of LNG and try to sell the cargo on spot markets or on short-term contracts.
Yes, new LNG tankers on order will help relieve the shortage of ships available. Thirty of the 72 tankers that will be christened by the end of 2015 are being built on spec, not committed long term to a route between an LNG plant and its customers, said Richard Pratt, vice president of Fearnley LNG, a Norway-based broker and consultant.
All of these developments help unsettle the LNG industry’s traditional model of long-term contracts between LNG plants and fixed destinations.
But North American LNG exports will not change the world very much, the naysayers said.
John Fahy, managing director of Britain-based ERAS Consulting Ltd., said North American exports will merely elbow aside the world’s highest-cost suppliers, providing little effect on global gas prices.
Keith Barnett, senior vice president of Asset Risk Management, a U.S.-based energy-pricing consultant and strategist, said North American exports won’t move global prices because they’ll account for maybe 5 percent of global gas trade. Exports might allow a couple of buyers to leverage some price break on their LNG supplies, but the overall market won’t really be affected because of the small volumes involved, he said.
Low prices sting U.S. producers Most speakers also discounted buzz that exports could inflate North American natural gas prices meaningfully by creating a new demand outside the country for the nation’s gas production.
They shrugged off as alarmist the headlines from this year that Lower 48 wellhead prices could soar 50 percent in some scenarios if gas leaves U.S. shores.
Tom Choi, a Deloitte MarketPoint executive who has analyzed the U.S. price impact of exports, said shipping LNG from North American could raise prices only about 2 percent overall. That’s about 12 cents per thousand cubic feet, an amount the market would barely notice.
Thames, the Cheniere Marketing president, ran through a virtual sales pitch on why exports would be good:
• A new industry that spawns thousands of jobs.
• A lower U.S. foreign-trade deficit.
• Shrunken demand for oil when gas is used to make fertilizer rather than oil-based naphtha.
• Exports would set a floor on low prices because shipments will rise when prices are down, while setting a ceiling on high prices because exports will fade if prices rise too much.
Then Thames took aim at a key critic of North American exports: the petrochemical industry, which wants to continue enjoying low prices for its feedstock. If exports occur, Thames reasoned, more gas wells will get drilled for methane, and in the process the drillers will find more ethane — the petrochemical feedstock.
Price too low to sustain industry Thames, Choi and other speakers were in agreement that today’s natural gas price is too low to sustain the industry.
The United States has suspended some $57 billion in gas production because the market price is too low, said Michelle Michot Foss, an energy economist at the University of Texas.
Gas producers need $6 per thousand cubic feet, she estimated. “It’s a high volume, low-margin business.”
A consensus emerged that the industry needs a price between $4 and $7 to ensure supply keeps pace with demand.
Goncalves of Charles River Associates sees robust demand for gas. He predicted that U.S. gas consumption could grow by 25 percent — or 15 bcf a day — within a decade. The electrical-power and chemical industries would want two-thirds of that extra gas, and LNG exports would comprise the rest, he estimated.
Lower 48 gas prices must rise if the industry is to supply that growth, and prices have bounced up in recent weeks. But U.S. production growth might be stalling. U.S. gas production fell in February. Drilling rigs are retreating from unprofitable methane plays to focus on oil and gas-liquids wells, Goncalves said. Leading producer Chesapeake Energy Corp. got 90 percent of its revenue from gas in 2009 but will get 60 percent from oil and gas liquids this year, he noted.
He showed the conference delegates a chart on the economic differences between liquids-rich “wet gas” shale plays and dry-gas shale plays (methane). A drilling stampede is occurring in the Eagle Ford wet-gas field of Texas, where net costs are $2 per million Btu of production. The wet-gas portion of the big Marcellus field costs $2.20.
But the dry-gas production from Marcellus costs $4 per million Btu of production. Other hot shale dry-gas fields of recent years similarly are squeezed by today’s prices. Fayetteville in Arkansas costs $4.20 per million Btu of production; Barnett in Texas costs $4.50 and Haynesville in Louisiana costs $5.30.
Choi, the analyst from Deloitte MarketPoint, noted that production levels do respond to price. He said much of today’s production glut was spurred ahead by the high U.S. prices of 2005-2008, when U.S. spot prices averaged $7.74 per million Btu.
Today’s low prices will spark demand that will lift prices eventually, he said.
“The best cure for low prices is low prices, because they will stimulate demand,” he said.
Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/lng-industry-eyes-us-gas-developments.
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