(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 11 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
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
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
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.
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
"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.,"
"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
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
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)