Characterizing the rapid rise in shale gas as a surprise to the entire industry, Sempra Energy's top executive heading its liquefied natural gas (LNG) operations cautioned that the industry's current game-changer needs to be viewed from both global and historical perspectives. Darcel Hulse, Sempra LNG CEO, told NGI's Shale Daily that the whole shale gas story still needs to play out.
Hulse is concentrating on the fact that natural gas is now a global commodity, but is still basically priced regionally. And right now there is a huge disparity between North American gas prices and those in Europe and Asia. He quoted a $4.22 price in mid-December at Henry Hub when gas in Korea and Japan was fetching $9.70; Asia-China, $8.92, and Northern Europe, $8.57.
"We have excess supplies, and when that happens, the price drops," Hulse said. "To eliminate that disparity you have to either cut production or increase demand.
"Cargoes that would have been coming to North America have shifted to other areas of the global marketplace. We've seen an amazing number of cargoes go to South America in 2010 [mostly Argentina and Brazil], more cargoes than people had anticipated." He said the biggest surprise has been the volumes going to both of the South American giants.
From a free-market perspective, Hulse sees "beauty" in the growing commoditization of gas. "We're lucky as a world to have the ability to ship clean-burning gas supplies around the globe to help improve the planet."
What is having the biggest impact on Sempra's gas operations, which were originally formed around long-term forecasts of declining North American gas production, shale gas or global markets? Hulse did not pick one over the other, but he acknowledged that shale of late has had a "big impact" on the North American market, and its displacement of intended LNG imports underscores this impact.
"But the global natural gas market is growing, too," he said.
"The beauty of LNG right now is that it is connecting all of these markets," Hulse said. "It is right now shifting gas to Europe and Asia, and there have been new markets in South America and the Middle East. It is a dynamic situation. I don't think in a global market you can say one area or source is dominant."
As a caution, Hulse, in noting the cyclical nature of markets, said the reserves and potential of shale gas are enormous, but the longer-term question is how much shale gas can be produced at today's depressed wholesale gas prices. He remains skeptical of the long-term economics, given the still relatively short history the industry has had with shale.
The questions surrounding shale for those who want to raise them are still be answered as the shale boom plays out, Hulse said. The cost of producing all those shale reserves is considerably higher than current market prices for gas in North America. And what is likely to happen to the price of gas longer term?
"I don't make any prediction on market prices," Hulse said. "We try to manage our assets in light of market conditions. That is why Sempra has long-term contracts and infrastructure type projects."