Natural Gas in the US: A “Brave New World”

In their appearance at Flame in Amsterdam, the Netherlands, speakers from an industry association, research institute and a midstream player provided an overview of happenings in the natural gas industry in the United States, and what such developments mean for Europe.

Recalling that the last time he attended Flame in Amsterdam was about 9 years ago, Richard McMahon, Vice President, Energy Supply and Finance, Edison Electric Institute, said that at that time there was talk about the US importing gas, building regas facilities. He quipped, “The world has changed. It's a brave new world.”

For electric utilities and power generation in the US, he said that the shale gas revolution there has been a great development, “as we are driving demand for gas in the US.”

One advantage that America currently has in its fleet, he explained, is the ability to substitute between natural gas and coal; that could change going forward. He reported that there are 60-70 gigawatts of coal plants that will eventually go offline, limiting the price elasticity demand for gas and coal at present. “When the gas price is at $6 or above,” he explained, “the substitution starts to go in favor of coal.”

Because of the oncoming constraints without those coal plants, he said more gas storage and pipelines will be necessary. Meanwhile, he reports a tremendous reduction in carbon emissions due to fuel switching.

According to Mr. McMahon, daily electric demand for gas in the US currently runs at 22 BCF/day. “It's a huge demand that's growing,” he said. “Annual demand is over 8 TCF.”

He added that industrial load is also growing in the US.

In addition to gas coming on, wind and solar are also making increasing contributions to generation, he said, some of the investment due to incentive schemes.

Last year, he said, the industry made investments exceeding $100 billion, and significant investments have been made in the last 5-6 years. He said he expects this to continue for another 3-4 years. “The low natural gas prices that have resulted from all this supply, has really helped to cushion the impact of that on our ultimate customers – that's been a huge benefit,” said Mr. McMahon.

While much of the initial investment was made on generation, he said, now it is starting to shift to transmission and distribution.

“Most of the impacts of low gas prices,” he contended, “have been very positive.”

Meanwhile, Mr. McMahon reported that there are about five liquefaction plants under construction, while 15 were in the permitting phase. Public opposition, he said, is likely to play a big role in whether the facilities are built, having witnessed protest at a Federal Energy Regulatory Commission meeting.

Gas, he argues, is a facilitator of renewables, not a competitor

Angelina LaRose, Natural Gas Markets Team Leader, US Energy Information Administration (EIA), gave a preview of her organization's annual Energy Outlook 2015.

In a diagram of the shale oil and gas plays in the US, she pointed out the importance of the Marcellus shale in northeast, the US' most productive shale play. “A lot of what we're seeing in terms of the market reacting to the growth in production, it really can be encapsulated by the growth in production in the Marcellus, just to balance it out,” she said.

The most productive liquid play, she said, is in the Eagleford in southern Texas, where there's a lot of associated gas tied to the production of liquids. Right now, she adds, shale makes up about 55% of total US gas production, something which began decades ago in the Barnett shale as part of the “30-year overnight success story.”

She recalls, “Working with this technology has been going on for quite some time, and applying the technologies to other areas outside the Barnett in Texas has resulted in shale making up about 55% of current production levels.”

Today, she said, the Marcellus shale is the most productive of the shale plays – about 20% of US production levels.

“Someone commented recently, that if Marcellus was a country unto itself – if there was a Republic of Marcellus – it would be the third largest natural gas producer in the world, following Russia and the US.”

Additionally, she said, the area around the Marcellus used to be a traditional importer of natural gas. Today, she explained, gas consumption in the region is fairly stable. “This is in contrast to the growth in production in the northeast, which has more than tripled since 2008.”

Ms. LaRose said this growth in production is offsetting net inflows of natural gas into the region, “quite dramatically.”

“There have been days in the summer as well as in the shoulder seasons, where the US is actually a net exporter of gas into Canada, which several years ago we hadn't heard of,” she offers.

In terms of pricing, she notes that Henry Hub is at present relatively low, and has been around $3-4/mm Btu over the last several years. She said that the difference between Henry Hub and regional prices in the US can often be quite large, which can be attributed to transmission constraints in a pipeline. “That's exactly what we're seeing in the northeast right now.”

Prices in New York City and Boston, for example, can spike quite high during peak demand days during the winter because of limited pipeline capacity for bringing gas into the region.

That, she said, is in contrast to the Marcellus, which she adds also has it's own constraints. “It's not about getting gas into the region, it's about getting gas out of the region. Most of the time, not only are Marcellus prices the lowest in the country – lower than Henry Hub, clearly – they're also trading, in the past 6 months, several days close to $1/mm btu.”

While some of the Marcellus gas is making its way up to the northeast, according to Ms. LaRose it's not making it there in peak demand days. “That's why we're seeing a lot of pipeline projects,” she notes. She explained that there are challenges associated with expanding this pipeline capacity in New England.

“These pipeline companies aren't just focusing on sending the gas into the northeast,” she said. “They're also looking at moving the gas west, south.”

She reports that there have been several large reversal projects, one of which has recently come online last summer. “It's moving gas westward on the Rockies express pipeline, which was an enormous and expensive pipeline project that was designed to bring gas from the Rockies as far east as Ohio; unfortunately, as it got to Ohio it was just when the Marcellus started developing, so it was a bit of ill timing for the company, but now they're using reverse-flow on that pipe to bring Utica and Marcellus gas into Midwestern markets,” explained Ms. LaRose.

Regarding how shale will affect the market 25 years into the future, according to EIA estimates which show the US becoming an exporter of natural gas in the next couple of years.

“We do have growth in consumption: 22% from 2013-2040. But this growth in consumption is being outpaced by nearly 50% growth in production over that same time period.”

According to production type, she said into the future it will look similar to last year, with shale exhibiting the largest growth, followed by tight gas. The Marcellus, she adds, will remain the most productive shale play: “It has about 150 TCF of cumulative production. It's almost twice the size of the next largest shale play in terms of production. We have the Haynesville coming in the projection period at about 81 TCF, followed by the Eagleford, where a lot of gas is being produced in association with oil.”

Consumption in the US, she said, has risen with increased supply and more competitive prices. “Consumption is widely dispersed across the economy in the US. We have all sectors growing with the exception of the residential sector whose decrease in natural gas consumption is due to energy efficiency.

The largest growth area for consumption, said Ms. LaRose, are the industrial (growing by 2 TCF) and power sectors. “Most of the growth that we're seeing in the industrial sector occurs particularly through 2025, due to two reasons: sustained, relatively low natural gas prices going up to that period, as well as rising industrial shipments.”

Of the industrial groups, she said some are not only using natural gas as part of the manufacturing process, but also as a feedstock. Chemicals, she offers, is set to grow by 2-3%/year from 2013-2025.

She added, “Sixty percent of the energy used in that industry is for feedstocks.”

In all of the EIA forecasts, she said, the US remains both an importer and exporter of natural gas, “But imports are falling and exports are increasing.

In the EIA's reference case, imports to the US fall by over 40%, in contrast to exports in the form of piped gas to Mexico as well as LNG exports. LNG exports are calculated as 0.2 BCF/day from the lower 48 states; a project in Alaska is also set to come online, she said.

Ms. LaRose offered that regarding LNG exports, the organization takes the domestic supply price into consideration, adding liquefaction and transport costs. “We compare that to a representative, somewhat generic European, as well as Asian, competing gas price.”

The high oil and gas resource case, she said, is driven by a domestic supply price that is extremely low, which is enticing for LNG exports, she said. “For the lower price case, since the competing price in Asia and Europe we're assuming is linked to the oil price to some degree, and since it's that much lower, we only have very limited LNG exports coming out of the US, as in our analysis the construction costs and utilization of those facilities are just are not present.”

In the EIA's Annual Energy Outlook 2015, she said, “Across all cases prices are increasing, as the US continues to develop more and more expensive resources to support the level of consumption and exports that we're seeing within our projections.”

Ramzi Mroueh, Vice President, Origination, Cheniere International, also provide his company's perspectives. As noted in his presentation, By the end of 2015, Cheniere will be building 40 million tons/annum of LNG capacity, due online by 2020.

In the last 15 years or so another important trend has emerged, said Mr. Mroueh: LNG markets are much more liquid and flexible.

In view of the last “supply wave” from Qatar, whose contracts from two suppliers do not offer much flexibility, he argues that the Australian wave should offer much more flexibility, in the hands many more players.

He continued, “When the US LNG comes it's going to bring a totally flexible product in the hands of a very large number of players, so that's going to create the Atlantic basin as a very liquid, very efficient, deep market.”

Where that LNG will end up is a question, he said, likely to be determined by a number of indices responding to market signals and depending on prices.

Considering Europe has a very liquid market as well, and an abundance of infrastructure, Mr. Mroueh offered, “That means that Europe can keep playing the role of the market of last resort for LNG; on the other hand, Europe does import long-term baseload LNG and that will continue as well.”

Europe's infrastructure and having a deep, liquid LNG market on its doorstep should create security of supply for the continent, he said, but at a price.

“Whenever Europe needs to attract that LNG, it will have to compete with varied and flexible markets.” For example, he said that Middle Eastern LNG buyers have no other choice.

Mentioning the destination flexibility in US LNG contracts, he explained that buyers of US LNG are actually underwriting the construction of liquefaction facilities, but not other infrastructure, so it is much more flexible in terms of cancellation rights.

Behind the LNG facility, he said, is a deep and liquid gas market that will also facilitate LNG trade.

Mr. Mroueh said the typical pricing formula is Henry Hub plus 10-20% for losses and liquefaction, plus a liquefaction fee of $3-4, and then shipping, which should cost less than $2. “So the resulting price for the European buyer should be somewhere between $8 and $10,” he explained, adding that two-thirds of that price is fixed, so one-third of the price is exposed to market volatility.

If the prices go up, he explained, a huge amount of reserves will be unlocked, production will come on, and then the prices will come back down, as seen from the last very cold winter.

He summarized, “The US is going to become a major player in the LNG industry. The oncoming supply picture is going to have a profound change in how LNG is traded.”

Cheniere, he said, is proud in the role it is playing to develop the industry and expects more to come.

-Drew Leifheit