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U.S. Gas Growth Seen Cutting Back Canadian, LNG Imports

By next year the United States is expected to produce more natural gas than it's ever produced in history, and the new supplies will pressure pipeline systems and likely damage the prospects for Canadian imports and liquefied natural gas (LNG) facilities, said Bentek Energy LLC CEO Porter Bennett.

Bennett was a keynote speaker Thursday at the LDC Forum Canada, which was held this year in conjunction with Canada's Industrial Gas Users Association. When he was first asked to speak a few months ago, he said he then had planned to discuss growing gas demand and shrinking gas supply. But that's not what the world looks like today, he told the audience in Toronto.

"Most people don't recognize that gas production is growing that quickly, certainly not the policy people," Bennett noted. "It's not only how much it's growing, but where it's growing. It's growing all over the place..." The new domestic gas has overwhelmed the U.S. pipeline infrastructure, which in turn has backed up Canadian imports, he said.

Through July, U.S. gas output is up nearly 9% from January-July 2007, he noted. Output is likely to be down for September because of the shut-ins from hurricanes Gustav and Ike, but by end of this year, "United States gas production will be up by at least 6% and more like 8-9% for the year...There's been a decline in U.S. demand, and supply is building in a significant way," he said.

New Mexico's San Juan Basin production continues to decline, but otherwise, nearly every other U.S. basin -- onshore and off -- is up, even the Gulf of Mexico, hit by hurricanes this year and historically on the decline. "The Rockies, in the Green River...Overthrust, Powder River Basin, Piceance, Uinta...we're up 1.2 Bcf/d in the Rockies. and nobody thought that would happen last year. It's completely overwhelmed the gas system, and it's why the Rockies had 79 cent gas last month."

Most of the new U.S. gas is concentrated in three areas: the Rockies, the ArkLaTex/Arkoma basins and Appalachia, where the Marcellus Shale is "becoming a major player" in the United States, said Bennett. "These new sources of supply have huge consequences for the United States and its ability to export gas out of Canada," said Bennett.

The Rockies Express (REX) pipeline system's development "explains both the pattern and the decline of gas from Canada," he said. REX created a "choke point" by filling up adjacent pipe systems, and "as a result, the gas has to back out, and one place is backs out is back to Canada."

Since REX ramped up, "Canadian deliveries to Northern Natural Gas have fallen...that's one of the reasons that gas has dropped off, and it explains the drop in deliveries from Great Lakes, Northern Border..." REX also has pushed Anadarko and Permian basin gas supplies south and west via Transwestern's pipeline. By early last February, "Anadarko gas flows on Transwestern reversed and were feeding California almost exclusively."

REX's ramp-up has "completely flipped" some pipe systems, Bennett noted. "Gas out of the Permian, Anadarko basins has turned and gone out to California" instead of east, and after El Paso Corp.'s Ruby Pipeline is completed in 2011 to carry more Rockies gas to western markets, "that again will impact Canadian flows, and there will be continued pressure on Canadian gas in the western United States."

Canada's gas exports also have been hit by the huge amount of supply emerging from the southeastern part of the U.S., where myriad pipes move gas to markets southeast, east and north, said the Bentek CEO.

"The Southeast supply area's capacity is pretty much full on peak days," he noted. With more than a dozen more new pipes on the drawing board or under way, "Canadian gas then will have more competition from the Southeast into the Chicago area...with 4.5 Bs a day of gas on gas competition..."

Once more southeastern gas moves into the system, the REX system then could have more of its supplies back-up, Bennett said. "And then there is the Marcellus Shale...Appalachia is not going to help the situation and it will probably make it worse."

Some of the gas build will be "cleaned up with a lot of small projects," said Bennett, "but we also have the Canaport LNG facility, the Northeast Gateway LNG facility that will bring some LNG in there. In other words, U.S. demand will be solved by things other than Canadian gas, I believe."

With enough domestic gas, the United States would require fewer Canadian imports through 2010, said Bennett. However, by 2011, "the drilling decline, and that will certainly happen in the United States over the coming year, will probably mean more Canadian gas then eventually will be imported until supply growth again commences...Drilling can't be sustained at the price levels existing in the United States, particularly in the Rockies.

The gas boom and tight credit will force producers to finance their projects with cash flow, "so there will be cutbacks," he said. "We've heard evidence that in the Rockies there could be drilling cuts as much as 50% this next year" (see related story).

If gas drilling were to be drastically reduced, it would take "two years to turn the growth curve into a decline curve," said Bennett. "A couple of years from now, because of the political reality and economic realities, it is going to combine to slow production growth down so that we have another period of shortfall and prices spike right back up again. We don't seem to learn that lesson."

Along with a drop in Canadian gas imports, "LNG is virtually nonexistent in the United States," Bennett noted. "When you look at the price in the balancing point and the Henry Hub, there's not much to see except along the Atlantic Coast. If you look at Canada, Canadian imports are down significantly too...The United States is not using as much Canadian gas as they have..."

LNG imports "will have a far more marginal role than once envisioned, except on those occasions where the United States serves as a depot of last resort," he said. "There is very little market in the United States. We don't see prices anytime soon being such that would bring LNG to the United States if there is demand anywhere else in the world. And there's a pretty good bet there will be demand elsewhere. There will be periods in Europe, Great Britain where there will be some parity, but mostly not at prices relative to draw much LNG to the United States."

What, then, happens to the regas facilities now built or under way in the United States?

"I hate to be thinking of their shareholders," said Bennett. "It doesn't look good. We are starting to hear, we've heard two or three times, about converting regas to liquefaction facilities. Last April, Chesapeake Energy's Aubrey McClendon made some fairly audacious comments that the next LNG facility would be a liquefaction facility. He was amply derided for that comment, but it probably makes a hell of a lot of sense. It's the only way to get gas out of United States at a fast enough pace to solve the problem.

"If you try to keep the cycle from progressing, there's probably a way to do it. Regas facilities have a lot of problems if they are trying to make returns in short term. It will be five years out before that changes."

To move gas to international markets would take "a couple or three years to get liquefaction built in the United States...If you look at other facilities under way around the world where is the market for U.S. gas? It's an excellent point. There's really not a growing market there, particularly in the economic climate we are headed into over the next three to four years."

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