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Shale Gas Seen as Major Factor in LNG Export

The prospects for exporting U.S. natural gas are intertwined with a whole set of variables that are becoming increasingly tough to predict, according to the lead gas and electricity prognosticator at the California Energy Commission (CEC).

Those variables include coal-fired generation plant retirements, the widening natural gas-crude oil price spread, and the prospect for increased gas demand in the transportation and chemicals sectors along with international demand for natural gas and development of shale gas. Ivin Rhyne, who heads the CEC electricity and gas team, said those variables and much more, must be factored in with assumptions of long-term supplies and prices for shale gas.

According to Rhyne, part of a draft revised gas outlook by the CEC last year included an assumption of about 50 GW of coal-fired generating plants being retired in the near term, but added that he has received a lot of industry feedback saying that assumption is too low.

"Utilities told us they are expecting a great deal more [retirements] nationally, and in our updated outlook we're going to look at something on the magnitude of 90 GW," Rhyne said. "Having said that, interestingly, in the short term, it doesn't necessarily cause a tremendous shift in gas prices. But we do think if the larger number happens, it will push us a little faster toward [a market price that is closer to] the marginal shale gas price.

"However, as long as the marginal shale gas prices sit around the $4 to $6 range, that is where the long-term trend will be." He said the widening spread between gas and crude oil prices is being monitored by the CEC, but it is not of a "deep concern" at present.

"From an analyst's point of view, I keep in mind that California moved away from oil and coal for power generation in the late 1970s and 80s," Rhyne said. "That sort of divorced us from the co-movement between oil and natural gas. But that doesn't mean we are completely isolated from it."

As for eventual export of U.S. gas in liquefied form (LNG), Rhyne thinks that is dependent on shale gas production remaining strong.

"The other piece is that to the extent that Asia and European markets continue to pay a strong premium in gas prices, U.S. exports will be sought. If European and Asian gas premiums erode, we would expect U.S. exports to erode, too," he said.

As U.S. gas prices move close to marginal shale prices, the attractiveness for exports begins to wane, Rhyne said.

"To the extent that you continue to have strong shale gas production that tends to stay toward the lower end of the shale price band, we would expect that LNG export discussion will be made in earnest by a number of companies." The extent to which the federal government goes along with that "is still not clear." He added that another longer-term factor is the extent to which Europe and Asia develop their own domestic shale gas resources, which could influence how big U.S. LNG exports become.

Does all of this make forecasting natural gas market shifts more difficult?

"It has always been difficult," Rhyne said, "but the real difficulty for us is conveying the real uncertainty attached to any of the numbers we have to put out. It becomes even more uncertain as we go forward, simply because the diversity and interconnected nature of energy sources means gas is being tied to so many other energy sources, not just oil. An example is the gas-to-liquids boom. That movement and trend could certainly tie natural gas to liquid fuels and transportation in ways we haven't had to deal with previously.

"We have seen the international markets, and their stability or instability, creating a whole new set of problems, and then the interconnectedness of the U.S. market to international markets definitely adds a degree of difficulty that we haven't had to deal with quite so explicitly in the past. It is not just dealing with more variables; it is dealing with more and different kinds of variables that are acting in different ways."

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