Just the threat of U.S. exports of liquefied natural gas (LNG) could boost domestic natural gas prices, according to one analyst, who sees a healthy return for the industry on construction of liquefaction plants.
"If U.S. producers had the ability to export domestic production in the form of LNG, they would benefit in two ways: (1) by the margins they achieved from the actual LNG they export, and (2) by the higher margins they get on their domestically sold gas simply because they have the option of exporting gas to worldwide markets," says independent natural gas analyst Pat Rau.
"Just the threat of being able to ship their natural gas elsewhere should lead to higher netback prices in the U.S., without ever having to actually ship LNG."
Rau, who has spent a number of years tracking the natural gas market, takes issue with the conventional view that adding liquefaction and transportation costs to U.S. gas production, which already is significantly higher priced than natural gas from the Middle East, would make it uncompetitive.
The Energy Information Administration (EIA) estimates that it costs roughly $1.5-2.0 billion to construct a liquefaction plant that annually produces 390 Bcf. That translates to roughly 1.07 Bcf/d of export capacity. Rau would take the lower estimate since the plants would likely be built on the same areas as the existing LNG receiving terminals because they already have the infrastructure, shipping lanes, site preparation and zoning in place. That would take a healthy chunk out of the project costs.
As an example, Rau calculates it would take 11 new export plants at a cost of $16.5 billion for export capacity to equal expected import capacity of 12.135 Bcf/d by 2010.
Assuming those plants are built, just the threat of being able to ship supply to foreign countries would add 10 cents/MMBtu to the netback price of all gas produced in the U.S., said Rau, who formerly was with the Harris Nesbitt/BMO Capital Markets investment firm. Considering that the 2009 Nymex strip is about $6.40/MMBtu with production expected to come in at 21.8 Tcf, adding 10 cents/MMBtu, or 1.5%, would lead to an additional $2.18 billion that U.S. producers would receive annually for their gas.
The $16.5 billion initial investment would have a simple payback period of 7.5 years, "not bad on this large of an investment," Rau said. And that 7.5-year payback doesn't include any additional margins that producers would earn if they actually did ship LNG. "Considering gas was going for $15/Mcf in the Eastern Hemisphere for much of 2008, a producer could really lower that payback time period by selling more gas overseas. You have to figure the depreciable lives of the liquefaction facilities would be closer to 25-30 years, so this would set producers up for substantial long-term net free cash flow/returns on invested capital," Rau says.
He concedes that simple payback is not the way most companies would choose to build such a project; they would more likely do it based on a net present value analysis, but it serves to easily illustrate the calculations.
The key to all this: who is going to pay for it? "It has to be led by the majors, because they have the most to gain from this. They have not only the cash to fund this, but also declining reserve bases, so the best way they have to increase their value is to maximize the price they receive for their production," Rau suggests.
"I would also look for the majors to partner on any kind of venture here, so they can share the risk, and to avoid the 'free rider' problem. One company wouldn't want to take the entire financial burden on themselves, only to see the rest of the industry benefit from higher netback prices on their dime. I think you will probably see a coalition of producers all contribute toward this type of project."
It may appear to be a long shot, but it could be an answer to an excess supply of domestic natural gas, idled LNG import facilities and European countries increasingly nervous about their gas supplies from Russia and the Middle East. Next question: will the politicians allow a lot of U.S. natural gas to leave the country? There might be a supporting argument built on the U.S. balance of payments problem run up by expensive oil imports.
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