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GasMart 2011: Shale Exports Could Face Cost Challenge

Companies that aim to export domestic shale gas can expect to face a tough spot market, according to Terry Engelder, the Penn State University geosciences professor who helped prove the value of the Marcellus Shale.

"It still does cost real dollars to produce Marcellus gas, and the associated gas from the Middle East comes to us at virtually no cost," Engelder said at GasMart 2011 in Chicago on Wednesday. "So whoever liquefies that stuff in the Persian Gulf can put it in a boat and put it into the spot market and adjust to that spot market as need be to capture it."

With shale gas causing forecasters like the Energy Information Administration (EIA) and the Potential Gas Committee to increase their assessments of domestic reserves, operators are mulling the possibility of someday exporting surplus supplies to overseas markets as liquefied natural gas (LNG) (see Shale Daily, April 28; Nov. 29, 2010; Nov. 2, 2010).

According to EIA data, the average price received by U.S. producers for exported LNG has increased every year since 2005, rising from $5.79/Mcf in 2005 to $9.53/Mcf in 2010 (see chart). From 2005-2008 those export prices trailed the price domestic producers received for gas exported via pipeline, but that relationship shifted in a dramatic way starting in 2009. The average premium for U.S. LNG versus pipeline exports was $4.06/Mcf in 2009, and an even more robust $4.78/Mcf in 2010. Compare those premiums to the $4.00/Mcf and $4.39/Mcf average Henry Hub spot market prices in 2009 and 2010, and it is little wonder that U.S. producers are salivating at the prospect of sending more domestic natural gas supply into the global market.

Some of the export projects include:

If any of those ventures hope to export shale gas, though, they will need to compete against the low- and no-cost associated gas coming out of oil-prone basins such as the Gulf of Mexico and the Persian Gulf, Engelder said.

"In general, petroleum is the elephant in the room, and natural gas is the byproduct coming out of those wells almost at no cost, whereas in an unconventional resource the money invested by Wall Street is invested specifically to produce natural gas," Engelder said. "When you have to pay for natural gas production, that means something about how low the fees are before you lose money as opposed to associated gas, which is present because of the search for another product."

Engelder is not alone in that opinion. An April report from analysts at Pan EurAsian Enterprises concluded that the United States would likely be "a supplier at the margins" if it began exporting LNG (see Daily GPI, April 5).

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