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Global LNG Market Limited, Say Experts

The Marcellus Shale is a "solidly economic" shale play that could play a big role in liquefied natural gas (LNG) exports from the United States to Europe and Asia, but regulatory hurdles, stiff competition and market forces are all significant obstacles, according to two energy industry experts.

Donald Raikes, vice president of Dominion Transmission Inc., recently told attendees of Hart Energy's DUG East Conference in Pittsburgh that "there is a global market [for exported LNG], but it's not unlimited."

Several companies are seeking permission from the U.S. Department of Energy (DOE) to export LNG and from the Federal Energy Regulatory Commission to build export terminals, including Dominion Cove Point LNG LP, which has proposed a $2 billion liquefaction project to convert natural gas from the Marcellus and Utica shales into LNG for export from its terminal in Lusby, MD (see related story and NGI, Oct. 29; May 21; April 30).

"We're in competition to serve both the Japanese and the European markets," Raikes said. "At the end of the day, there will only be a portion of those projects that will go forward."

The industry is awaiting a much-anticipated report commissioned by DOE on the domestic market impacts of exporting liquefied gas, the second part of a study to determine whether and how many export projects DOE should approve. Last week rumors were circulating identifying the company doing the DOE report as NERA Economic Consulting, a March & McLennan company. The results have been promised by the end of the year.

And just last week the Environmental Protection Agency (EPA) injected itself into the export controversy, asking FERC, as part of its siting review of the Cove Point LNG export terminal, to expand that review to investigate the environmental impact of the production of shale gas that would be exported from the terminal. The EPA action appeared to be bringing the big guns into a battle the Sierra Club had already lost before FERC when the Commission turned down the environmental group's request to consider the environmental impact of shale gas development as part of another company's request for an export terminal (see separate story).

Raikes cited what he called a "middle of the road" report conducted by Deloitte MarketPoint LLC in 2011, which projected that natural gas prices in the Marcellus would only climb 10 cents/MMBtu if regulators approved exporting 6 Bcf/d of LNG. "In terms of 6 Bcf/d, when you look at a 70 Bcf/d domestic market and you look at the production that we have today, all of those things factored together say there will not be a significant [price] increase for residential or manufacturing."

Andrew Coleman, managing director for exploration and production research at Raymond James Energy Capital Markets, said the U.S. economy needs to improve before LNG exports would move forward.

"We've got to see improvements in the U.S. economy and employment numbers before the federal government will probably let folks have an aggressive opportunity to export gas," Coleman said. "Certainly it has to be one of the ways to add additional sites for demand and help balance the market out down the road."

The Marcellus is "solidly economic," said the Raymond James analyst. "We think that the Marcellus in northeast Pennsylvania is the best, at about 60% IRR [internal rate of return], and that's based off the 10 Bcf/d wells for around $6 million," Coleman said. "If you add in the liquids component that Range Resources Corp. is seeing in the southwestern portion, then you get about a 40% IRR [internal rate of return], and that's largely because you've got additional costs to process."

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