November 19, 2009 / 7:31 PM / 10 years ago

LNG exports seen as doubtful cure to U.S. natgas glut

NEW YORK (Reuters) - The United States could be on the road to a long-term oversupply of natural gas, but major exports in the form of super-cooled liquefied gas — commonplace in the Middle East — do not appear to be a cure.

Growth in U.S. gas supplies is likely to outstrip demand for most of the next decade, primarily because of the boom in shale production, pressuring prices.

That has fueled talk in the industry of building plants to allow export of liquefied natural gas to regions where the supply could fetch a higher price, but experts see little chance of such moves on a commercial scale any time soon.

“This is something we get asked about quite a lot. We have looked at it, but the short opinion is that it’s pretty unlikely,” said Murray Douglas at Wood Mackenzie in Houston.

Early this decade, U.S. producers struggled to find enough gas to keep up with growing demand, as rapidly depleting conventional wells stirred concern about shortages.

Producers were aware of the vast reservoirs of shale gas in North America, but much of that supply was thought to be uneconomical until recent advances in horizontal drilling and rock fracturing techniques changed that picture dramatically.

Now, the United States is estimated to have 2,000 trillion cubic feet of technically recoverable gas, or enough at current production rates to supply the country for more than 90 years.


With all that gas within reach, why not develop the ability to export LNG to higher-priced markets in Asia and Europe?

A small liquefaction plant in Alaska has been shipping LNG to Japan since the 1960s, but building a new one would be a big financial and political gamble.

It can take five years and $5 billion or more to build a standard 5 million tonnes per annum onshore liquefaction plant.

Some estimates put the break-even cost at about $3 per million British thermal units, not including the cost of gas, which would make it hard to compete with producers like Qatar.

“The big dilemma is the cost of the feedstock. The price of our gas at the wellhead is higher than in competing countries,” said Bill Cooper at the Center for LNG in Washington.

Besides the huge investment, long-term supply contracts must be locked up to get any project moving. Shale production is so splintered, it would be difficult to close enough deals to feed the operation for 20 years or more.

“A lot of shale plays in the lower 48 (states) have too many players, so it’s not going to be easy to get 20-year contracts, and they’re not very close to tidewater,” said Stephen Thumb at Energy Ventures Analysis in Virginia.

Experts say any plan to build an onshore liquefaction plant here would run into environmental and local opposition, as was the case with numerous regasification terminals proposed for coastal regions earlier this decade.

Perhaps the biggest hurdle would be political.

“With all the focus on energy independence, some politicians may not want to let the gas out of the country,” Thumb said.

The market may be oversupplied now but could be hard pressed to keep up with demand later in the next decade, he said.


Despite the obstacles, some options could make exporting LNG feasible if the price was right.

One might be to construct a plant in Alaska, where there are huge but stranded gas reserves on the North Slope.

A new pipeline would have to be built, but a plant sited near Valdez, a key loading port for Alaska oil, would offer a choice to ship Arctic gas to the lower 48 states or process it for export, depending on price.

Meanwhile, Royal Dutch Shell Plc (RDSa.L) is developing new floating liquefaction technology for an Australian field, which could prove a good option if it works.

Specially designed tankers would anchor far offshore over deepwater gas fields and process gas on location.

That would eliminate the need to build pipelines at sea and would reduce the environmental footprint of the operation. They can also be moved to a new location once a field runs dry.

“The Shell technology (theoretically) could be used in the states like in the deepwater Gulf of Mexico,” said Thumb.

But he remains skeptical. Analysts said cost may be a deterrent, with estimates putting the tab for a new FLNG tanker at $5 billion or more.

A third, but less likely, option might be to retrofit an existing regasification plant, many of which are currently underused. However, costs may still be too high, experts say.

Editing by Jeffrey Jones and Marguerita Choy

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