The current spread between U.S. and European/Asian natural gas prices supports export of liquefied domestic gas from the Lower 48, but it’s likely too uncertain to support the long-term, billion-dollar commitment needed to bring large-scale liquefaction to the U.S. Gulf Coast, according to an analysis by Pan EurAsian Enterprises Inc. released last week.
“…[A]t most, two LNG [liquefied natural gas] terminals to export domestically produced gas in the U.S. will be built in the U.S. over the next five years,” they said. “However, unless the Marcellus Shale area supports one terminal, we believe that it is more likely [that] no export terminal will be built in the U.S.”
Citing a robust Marcellus reserves outlook — supported by data from the U.S. Geological Survey (see NGI, July 11) and Pennsylvania State University (see NGI, Aug. 29) — Pan EurAsian said “production from the Marcellus Shale has limited access to the rest of the U.S. markets [besides the Northeast]. This may have the effect of throttling Marcellus production and driving prices down and making export markets a more attractive alternative.”
For this reason, the firm said the Dominion Cove Point LNG import terminal “is well suited” for the addition of liquefaction and export capability to serve Marcellus production. Dominion Cove Point LNG Inc. recently filed an application with the U.S. Department of Energy for just such a scheme (see NGI, Sept. 12).
“…[T]he Dominion Cove Point terminal might offer valuable optionality such that a producer of natural gas in that area might be willing to take the long-term payment risk [of an LNG export facility], especially if done so in partnership with a customer having access to one or more foreign markets.”
However, the overall outlook for LNG export from the Lower 48 as expressed in the report “LNG Exports from the United States — Wishful Thinking?” is dour. The report is a follow-up to the firm’s “Reversal of Fortunes” report, which called the outlook for LNG exports “tenuous” (see NGI, April 11).
The latest paper asserts that there is “a good likelihood” that at least some of the LNG export projects proposed for Western Canada (see NGI, Sept. 5) will get built. It also notes that small-scale containerized export of LNG as proposed by Carib Energy (USA) LLC (see NGI, Aug. 8) is quite different from the large-scale projects.
Hypothetically, if the three projects proposed for Western Canada and Dominion’s Cove Point as well as the four Gulf Coast projects were built, it would make for capacity to liquefy and export from North America about 68 million metric tons of LNG per year, the analysts said. By comparison, Qatar, the world’s largest exporter of LNG, has capacity of 77 million metric tons per year.
Clearly, the United States is not about to be the next Qatar, but project backers can dream, and “superficially, the concept of selling ‘cheap’ North American natural gas into high-priced global markets as LNG makes great economic sense,” Pan EurAsian conceded.
However, the potential for upward pressure on domestic gas prices is real, as is the prospect of lower gas prices in European and Asian markets, the analysts said.
In North America, producers face the prospect of higher costs due to increased regulation, particularly that which could be directed at hydraulic fracturing. Additionally, producers have been focused on liquids-rich production for the uplift higher liquids prices provide their netbacks. But what if the liquids markets become saturated, putting downward pressure on gas production overall and upward pressure on prices? the analysts asked. Finally, gas-to-liquids technology is gaining traction in the vehicle fuels sector, which could boost demand for and prices of domestic natural gas, they said.
On the market side, Japan, which accounts for about one-third of all global LNG trade, has been leaning more heavily on LNG for its energy supply in the wake of the earthquake and tsunami that wracked its nuclear power industry earlier this year. But that won’t last forever, the analysts said.
In Europe the gas industry has been disaggregating and moving from a long-term contract model to more of a spot business — and presumably lower prices, the analysts said. Further, they asserted that the linkage of European natural gas prices to those of oil is weakening.
“…[W]e do not believe that one can presume that European natural gas prices will remain high due to the sustainability of the gas-to-oil price linkage,” they said. “Nor do we believe that one can rely on the present tight LNG markets, driven by the anomalies of the Japanese markets, to keep LNG supplies tight and prices high.”
Nevertheless, Cheniere Energy Partners LP is pressing ahead with its effort to add liquefaction capability to the Sabine Pass LNG terminal in Cameron Parish, LA. Last week the partnership said it expects to net about $60 million in new public offerings, some of which would be used to fund development costs of liquefaction at Sabine Pass.
“Cheniere Partners intends to use the net proceeds for general business purposes, including development costs of its expansion project to add liquefaction capacity at the Sabine Pass LNG terminal,” the partnership said. In a related filing with the Securities and Exchange Commission (SEC) it was made clear that liquefaction capability at Sabine Pass is not yet a sure thing and may never come to be.
Plans are for the liquefaction facility to be designed and permitted for up to four LNG trains, each with production capacity of about 4 million metric tons per year. Cheniere Energy Partners said LNG exports could begin as early as 2015 if the project moves forward. LNG trains may be constructed in phases, coming on line about six to nine months apart.
“We intend for Sabine Liquefaction LLC, our wholly owned subsidiary, to enter into long-term commercial contracts for at least 3.5 [million metric tons per year] (approximately 0.5 Bcf/d) per LNG train, before reaching a final investment decision regarding the development of the LNG trains,” the partnership said in its SEC filing. “We are negotiating definitive agreements with potential customers.”
While Cheniere Energy Partners has been touting talks with a number of parties (see NGI, May 30), a deal has yet to materialize.
The addition of liquefaction capability would render the Sabine Pass facility bidirectional with the capability to offer customers the flexibility to both import and export LNG depending upon market conditions. Such a capability has been touted by Cheniere; however, Pan EurAsian Enterprises said “bidirectionality” is overrated because it “ignores what we call ‘no man’s land.’
“No man’s land is the differential range that still has U.S. prices for natural gas lower than foreign prices, but not low enough to meet the requirements set out by the Cheniere [pricing] model and the U.S.-sourced LNG will be too expensive for foreign markets. However, the cost of LNG imported into the U.S. will also be too expensive to sell in the U.S. markets.”
As Pan EurAsian sees it, no man’s land is about $4/MMBtu wide. If gas prices at Henry Hub are $4/MMBtu and LNG is being landed in the United Kingdom for $6/MMBtu, U.S. exports won’t be attracted to the UK, nor will the U.S. be able to import LNG, they said.
Because of the combination of gas price volatility with LNG terminal projects that involve large investments and long lead times, import terminals in the United States have a dubious track record.
The LNG import terminals at Cove Point, Elba Island, GA, and Lake Charles, LA, were built and almost immediately mothballed in the late 1970s and early 1980s because natural gas prices in North America dropped dramatically between the time the projects were conceived and when they were completed. The owners of those terminals all took huge writedowns.
Lake Charles reopened in 1988, but Elba Island and Cove Point did not start receiving LNG cargoes until 2001 and 2003, respectively, when the LNG coming in through the discounted terminals could compete with rising domestic gas prices.
Thirty years later it’s deja vu for the import terminals built in the last 10 years, which still carry a heavy investment burden and are facing declining throughput, once again because of cheaper U.S. gas. The question is: will large dollar investors be willing to pile more funds into the expensive process of converting the faltering import terminals to export at a time when the future of the world market for natural gas is unsettled?
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