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U.S. Majors: Off the LNG Boat and Back Home?

Much has been made of the promise of liquefied natural gas (LNG) for curing the nation's gas supply woes. By most, LNG is seen as vital for meeting growing domestic gas demand in the face of declining domestic production.

Clearly, LNG is coming to North America; how much and how soon remains to be seen. But some are seeing signs that what is really needed might not be quite as much as once thought.

"I believe fundamentally that eventually LNG comes to the U.S. not because we need LNG but because the economics of finding and producing gas elsewhere in the world are more favorable than the economics [of producing] in the U.S.," says Catherine Elder, RW Beck senior director and head of the firm's fuels practice.

In other words, LNG can and will balance the gas market -- at least unless/until it becomes more economic to produce gas domestically. But isn't the U.S. essentially tapped out?

Not so. Major producers are rediscovering what domestic independents have known for years -- that there is still a lot of gas in the ground, but it's categorized as unconventional, i.e. hard to produce gas from coals, shales and tight sands.

While the majors waded into the deepwater Gulf of Mexico and pursued overseas opportunities, numerous independents targeted gas-bearing coals and Devonian shale back home in the United States. Independents, to a large extent, have been responsible for figuring out how to produce unconventional gas. Now that technologies have advanced and prices have risen, the domestic resource base is again looking attractive to the majors.

ExxonMobil Corp., BP Plc, and Royal Dutch Shell Plc are evidencing a renewed interest in domestic gas opportunities, the Wall Street Journal reported last week in its online edition. BP and ExxonMobil have committed to the development of domestic fields that they have held for years. Shell is acquiring new acreage to establish a larger U.S. presence, the Journal reported.

Elder cites BP's October announcement that it will spend up to $2.2 billion to double production from its acreage in Wyoming's Wamsutter Field in a program to include 2,000 wells over the next 15 years. "$2.2 billion invested in Wyoming is a heck of a lot of money, probably more than BP has spent there in a long time on oil and gas drilling," Elder says. Also noted is Shell's entry into the Barnett Shale last year, historically the stomping ground of independents such as Devon Energy.

While major producers are rediscovering domestic opportunities, some of the luster is coming off the global LNG scene. "I have this bad feeling about Indonesia and sort of the notion that there were going to be huge amounts of LNG imported out of Indonesia," Elder says.

Indeed, a report from the U.S. Embassy in Jakarta titled "Troubles in Indonesia's LNG Industry" says declining production and the Indonesian government's decision to cancel 51 LNG cargoes this year "are the most visible signs of trouble in Indonesia's LNG industry." The report says, "Protracted negotiations between GOI [government of Indonesia] and a BP consortium to develop a third LNG center at Tangguh will delay new LNG production until 2008." The report predicts that Indonesia will continue to lose world market share and LNG revenue and calls on the government to strengthen LNG governance and revise/clarify regulations.

Indonesia's share of the world LNG market shrank to 21% in 2003, down from 32% in 1998, according to the U.S. embassy there. Elder says the news out of Indonesia gives her the feeling that U.S. majors might be backing away from the global LNG stage and returning to dry land at home.

Export troubles in Indonesia come amid predictions by a BP executive that "China will have a very difficult time buying LNG at the prices it's willing to pay," Dow Jones Newswires last week quoted BP Global LNG Division VP Mark Pilcher saying. "Right now there is a shortage of LNG in Asia, and that's why prices are so high. It's also definitely true in the world."

LNG prices are soaring on demand in Asia, Europe and the United States. According to one Purvin & Gertz Inc. consultant, the price of LNG shipped to Europe may more than double to US$15/MMBtu.

"The globalization of LNG is happening," Bloomberg News quoted Chevron Global Gas VP Audie Setters as saying in November. "Henry Hub prices have become the benchmark not only for Europe but for spot cargoes across the world today."

The average of monthly LNG imports to the United States January through September was 51.4 Bcf. The high for the year so far was in January when imports were 57.8 Bcf, and the low was in August when imports sank to 43.7 Bcf. September saw 51.8 Bcf coming to the U.S.

What to expect? As she looks at majors' renewed interest in unconventional resources, Elder says she prefers the wisdom that is anything but conventional.

"I've got this theory that whatever the conventional wisdom is, it has to be wrong," she says. "'We have to have all this LNG. We have to have all this LNG.' It must be wrong because there's always something that pushes back in the opposite direction.

"And I suspect that what we've not taken a good enough look at is where it pays producers to invest their dollars. The real question is where are they going to invest those profits."

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