Liquefaction and export of domestic U.S. gas is no longer a pipe dream but an eventual certainty given the abundance of supplies from shales and thirst for gas in other parts of the world, particularly in Asian markets, said speakers at Deloitte’s annual Oil & Gas Conference in Houston Thursday. True, there are export naysayers; a recent Deloitte study commissioned by BG Group addresses at least some of their concerns.
Generally, export of domestic gas is perceived by some to be anti-U.S. consumer, that is to say a threat to supply sufficiency and an elevator of citygate prices. On behalf of U.S. LNG export hopeful BG Group, Deloitte MarketPoint LLC (DMP) assessed the potential economic impacts of LNG export using its “North American Power, Coal and World Gas Model.” The result is the report “Made in America: The economic impact of LNG exports from the United States.”
The finding: export of domestic gas as LNG would push prices up, but only a little, and the greatest effect would be felt closest to the point of export, namely the Gulf Coast, or the energy country of Texas and Louisiana.
“…[T]he World Gas Model projects a weighted-average price impact of 12 cents/MMBtu on U.S. prices from 2016 to 2035 as a result of the [study-projected] 6 Bcf/d of LNG exports,” the report said. “The 12 cent/MMBtu increase represents a 1.7% increase in the projected average U.S. citygate gas price of $7.09/MMBtu over this time period.”
However, down south in energy country the impact is nearly double: 22 cents/MMBtu, “significantly higher than the national average because of its close proximity to the prospective export terminals.” Market areas distant from the Gulf Coast would see a price impact of less than 10 cents/MMBtu.
“Focusing solely on the Henry Hub or regional prices around the export terminals will greatly overstate the total impact on U.S. consumers,” the report said. Deloitte’s Gary Adams, vice chairman for U.S. oil and gas, told conference attendees, “If we do export LNG by 2015, we’re not expecting to see a great increase in prices.”
Global gas trade used to be regionalized not that long ago, Andrew Walker, BG Group’s head of LNG strategy, said. In that sense markets were a bit like Las Vegas: “What happened in Asia stayed in Asia; what happened in North America stayed in North America,” he said.
However, over the last decade the LNG story has been one of globalization. “Cargoes are moving the breadth of the globe,” and there is price communication among markets, he said.
That doesn’t necessarily beget a guarantee of efficiency, at least not yet. One cargo might be on its way from Trinidad to Japan while another might be bound for the United States from Australia, simultaneously even, Walker allowed, “showing that sometimes the industry is not fully efficient.”
Nevertheless, LNG is globalizing gas, but it’s not commoditizing it on a global scale; that’s something different, Walker said, noting that some of last year’s price spreads: $4.25/MMBtu at Henry Hub, $13.18/MMBtu in Japan and all manner of prices in between, for instance.
Worrying about whether shipping LNG to Asian markets would create Japan-style gas prices in the United States “is almost a ridiculous question” in the view of Ken Medlock, a Baker Institute fellow in energy studies at Houston’s Rice University.
For one thing, he said at the conference, U.S. gas supply is particularly elastic now thanks to shale gas plays. Producers are more than capable of ramping up production to respond to a higher price signal, which, as economists like to say, is the cure for high prices. On the demand side, spot market LNG price spikes seen in Japan of late are a result to the curtailment of nuclear power generation following the Fukushima disaster.
“Do you really think that’s going to be material for a long period of time? Absolutely not,” Medlock said. “There are supplies that will respond to those higher prices, and one of those opportunities is LNG exports.”
Rather than a risk of higher gas prices for U.S. consumers, exporting LNG is an opportunity to create more U.S. jobs, said Walker.
The Deloitte study assumed exports of 6 Bcf/d, the amount possible from three export projects proposed at the time of the study’s commencement. These are Sabine Pass in Cameron Parish, LA, by a unit of Cheniere Energy (see related story); Freeport, TX, by Freeport LNG and Macquarie Energy (see NGI, Nov. 29, 2010); and Lake Charles, LA, by Southern Union and BG LNG Services LLC (see NGI, Aug. 8).
As the Deloitte report puts it, the volume of exports would be small relative to total domestic gas demand and, hence, insufficient to raise U.S. prices to the levels seen in markets such as Asia and Europe.
In the Northeast, where U.S. gas prices have traditionally been highest, the “Marcellus Shale is projected to dominate the Mid-Atlantic natural gas market, meeting most of the regional demand and pushing gas through to New England and even to South Atlantic markets,” the report said.
“The expected result is displacement of volumes from the Gulf, which combined with the growing shale gas production out of [the] Haynesville and Eagle Ford [shales], means the Gulf region is projected to continue to have plentiful production and remain one of the lowest-cost regions in North America.”
Back when the developers of Freeport LNG were buying liquefied natural gas (LNG) to commission capacity at their regasification facility in Brazoria County, TX, they were buying “$20-plus LNG in a $10 gas market.” The thought of liquefying U.S. gas for export to higher-priced markets crossed their minds, “but we didn’t believe the U.S. gas price relative to the global gas price was going to stay this way forever,” Freeport LNG CFO Hugh Urbantke told a Houston audience at another conference last week.
A short-term (five-year) liquefaction solution was considered, but high capital costs made such a move a non-starter. Further, “nobody really wanted to go to Washington and ask for an export license in 2008…” he said.
Urbantke told participants in law firm King & Spalding’s “Energy Forum: New Frontiers in LNG Exports” that there is a “singular difference” between the opportunities for liquefying and exporting U.S. gas and the typical liquefaction project elsewhere in the world. Typically, liquefaction projects are driven by the holders of the gas resources themselves. For them, the cost of liquefaction is a hurdle to surmount in order to get their gas to market.
In the United States, the upstream gas field development has been done by other parties — at significant cost — making the relative cost of liquefaction “a rounding error” in the larger context, Urbantke said.
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