COLUMN-Exports to bring no relief for US gas producers: Kemp

Wed Jan 11, 2012 11:16am EST

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(John Kemp is a Reuters market analyst. The views expressed are his own)

By John Kemp

LONDON Jan 11 (Reuters) - U.S. gas producers hoping exports will bring some relief from intense downward pressure on U.S. gas prices look set to be disappointed.

Large-scale exports could throw a lifeline to beleaguered domestic producers struggling with prices that recently slumped below $3 per million British thermal units as a result of the glut of fresh supplies accompanying the shale revolution.

But exporters will face tough competition for market share from conventional gas producers in Russia, Qatar and Algeria, as well as the massive new shale resources likely to be developed in Argentina, China, Poland and across North Africa, Eastern Europe and the Middle East.

As the shale revolution goes global, intense gas-on-gas competition will keep prices under pressure. If there is a window for major U.S. exports, it is likely to prove fairly short. The International Energy Agency's "golden age of gas" will bring benefits for consumers but is set to prove anything but golden for producers and exporters.

WAKING ENERGY GIANT

The past five years have seen a remarkable turnaround in the U.S. oil and gas market. As recently as 2005, the country was racing to construct liquid natural gas (LNG) receiving terminals to cope with an expected shortfall in domestic supplies.

However, the spread of hydraulic fracturing and horizontal drilling has doubled the country's gas resources, which could now supply more than 100 years of demand at today's consumption rate, according to a recent study by the National Petroleum Council.

The same technology is now transforming the domestic oil industry ("Prudent Development: Realising the Potential of North America's Abundant Natural Gas and Oil Resources" Sep 2011).

The result is an enormous reorientation of trade that will accelerate in future and revolutionise the energy industry in North America and around the world.

On the oil side, imports of crude have begun to fall for the first time since the early 1980s, and exports of refined products overtook imports for the first time since the 1970s.

For gas, most of the country's LNG receiving terminals are now idle. Gas producers are instead applying for permission to construct and begin exporting from a network of new liquefaction plants.

Gas exports are regulated under the Natural Gas Act. The Department of Energy's Office of Fossil Energy (DOE/FE) has already granted approval for six facilities to export up to 7.8 billion cubic feet (bcf) of gas per day (2.9 trillion cubic feet a year) to countries with which the United States has regional free trade agreements. A permit for another facility to export 1.7 bcf feet per day is under review.

Exports to free trade partners are granted almost automatically, but permission to send gas to other destinations is subject to a public interest test, and the Energy Department has been scrutinising applications carefully (15 USC 717b).

In May 2011, DOE/FE issued the first such permit to Sabine Pass Liquefaction LLC to export 2.2 bcf per day from a facility in Louisiana. Applications from another six companies are pending. If all these applications are granted, exports could reach 9.7 bcf.

PUBLIC INTEREST TEST

Applications granted or pending before the Department of Energy would permit exports amounting to around 15 percent of current consumption.

Gas consumers and utilities led by the Industrial Energy Consumers of America (IECA) and the American Public Gas Association (APGA) have opposed the applications, arguing that they will reduce the amount of gas available to domestic consumers and raise prices.

However, DOE/FE sided with exporters, concluding that "the existing and future supply of domestic natural gas is sufficient to simultaneously support the proposed LNG export volumes as well as domestic natural gas demand".

On the question of price rises, DOE/FE accepted industry submissions showing that exports would have little or no impact on traded domestic prices at Henry Hub. In any event, DOE/FE insisted prices were not relevant to its decision. DOE/FE is not a price manager.

DOE/FE guidelines require "the market, not government, should determine the price and other terms for imported or exported natural gas. The federal government's primary responsibility ... will be to evaluate the need for the gas and whether the import or export arrangement will provide the gas on a competitively priced basis ... while minimising regulatory impediments to a freely operating market".

Instead, DOE/FE focused on benefits from job creation in the construction industry, higher export earnings and tax revenues.

PRICE LINKAGES

The Industrial Energy Consumers of America objected that Sabine Pass is seeking to raise domestic gas prices by establishing a link to global markets -- where prices are still often linked to crude oil and are now much higher than in the United States.

"The problem is that when tight supply occurs, and it always does, increased demand from other places in the world will have the result of increasing the price of natural gas in the U.S.," IECA wrote.

"We are currently benefitting from the increased regional (gas) supply in the U.S. and Canada. For now, so long as domestic supplies continue to meet demand at affordable prices, regional prices (U.S. and Canada) promise to be lower than global prices," according to the lobby group.

Many gas producers do indeed hope exports can cure the problem of oversupply in North America and forge a tighter link to global gas markets and higher pricing.

Sabine Pass on its own will not export enough gas to affect domestic prices materially. But if all the projects pending before the DOE (and others not yet submitted) are given the go-ahead, the volume of exports could in theory tighten domestic markets and push prices higher.

The prospect of higher domestic prices via a link to export prices assumes increased or oversupply will remain restricted to North American markets.

But the shale revolution is about technology rather than the location of deposits and will not remain confined to the United States.

Potential shale deposits are widely distributed around the world. As the technology becomes mature, fracking and horizontal drilling is set to spread worldwide. Companies such as China's Sinopec, Saudi Aramco and Repsol-YPF are already showing interest in fracking firms to secure access to the technology.

Proponents envision the United States becoming the Saudi Arabia of natural gas, exporting to hungry energy consumers such as China. But it is at least as likely China will develop its own enormous domestic shale deposits to secure local supplies.

Why would China import shale gas from the United States when it has vast shale reserves of its own in the Tarim and Sichuan basins containing an estimated 1,275 trillion cubic feet of technically recoverable shale gas, as well as five other less well known basins, according to a study by Advanced Resources International prepared for the U.S. Energy Information Administration? ("World Shale Gas Resources: An Initial Assessment" Apr 2011)

U.S. gas producers have a first-mover advantage, but as the development of shale resources spreads globally, competition will increase.

The gap between domestic and international gas prices will narrow, but rather than U.S. prices rising to global levels, it is more likely that the link with oil prices will be broken and international prices will be pressured down to those prevailing in the United States.

Developers of export facilities are locked in a race with frackers and the international energy firms to secure market share before the export window closes.

By the time new LNG receiving terminals had been built in the late 2000s, the transformation of the North American gas market left them stranded as white elephants. Promoters of the new LNG exporting terminals must be careful not to share the same fate when they come into service in 2015 and beyond. (editing by Jane Baird)

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Comments (1)
hldb00 wrote:
It’s a shame even to consider exporting natural gas that could be used in place of oil we import from people who don’t like us.

Jan 12, 2012 1:31am EST  --  Report as abuse
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