Shale for Imports: Maybe a 2016 Story
Looking at incremental LNG capacity in the next few years, there is “loads and loads” of capacity coming online, according to Trevor Sikorski, Head of Natural Gas, Coal and Carbon Research, Energy Aspects, who spoke about “Shale as a Source of Import” at Flame in Amsterdam, the Netherlands. He explained, “This is going to be the big story of the gas markets in the next couple of years – not really a 2014 story, but maybe a 2016 story.”
His graph showed fairly large levels of incremental liquefaction putting cargoes in; he showed a “tiny little box” on the graph, which he said was shale gas.
The remainder, said Mr. Sikorski, was Australian, mainly from the Gorgon project. “Some of that is unconventional, some CBM, but really no shale in that. So a lot of conventional gas throwing in a lot of potential gas.”
He pondered the notion that Europe was only a residual taker of LNG, when there was no where else to dump it. On the diagram, he showed a “supply overhang,” initially when more re-gasification is added until a period when more liquefaction comes online.
“You're getting that supply overhang well in advance of really big volumes of gas coming in from the US,” he explained. “That's not to say, however, that that's not coming.”
Mr. Sikorski presented a seemingly endless list of LNG projects and said it was only half the list of pending LNG projects. “There's another 15 projects there, so there's an enormous amount of potential projects.”
He showed all of the US projects, reporting that Jordan Cove had been approved for global exports.*
Final investment decisions were not likely for the others until they received Free Trade Agreement approvals for global exports, according to him.
Those that had already been approved, he said, comprised almost 100 million tons of LNG – there were still another 325 projects. “We don't expect all of those to come in; even if just what's approved comes in, that's already a big number. You've already seen the US Department of Energy Secretary really bristle at suggestions that they're going too slow on this – there's about 3 months' gap between each one.”
After the Crimea issue in Ukraine, LNG export had become a political issue in the US, he said, but the process was likely to continue at the same pace going forward.
“Generally, they don't really have any reason not to approve them. They went out and commissioned a big study to find out what level would be good for the economy. The consultants came back and said, 'the more you export, the better it is for the economy.'”
This had eliminated any excuses for not exporting the gas.
Would all of the LNG coming online collapse prices?
Mr. Sikorski reported that there would be a very variable feedstock price from all of the US LNG exports. “The more demand you put on Henry Hub, the higher the price will be. When you get very large volumes the question is, can the supply catch up and stay high, or is it just going to push Henry Hub prices higher? At some point you close the arbitrage window.”
This was in contrast to Australian LNG which was all sunk costs and where producers continued to produce the gas.
To illustrate that, he offered the Marcellus shale, which he said had fundamentally altered the US market in ways no one could have dreamt of, because it was not located in a traditional oil and gas region, but in Pennsylvania. The increases in production there, he said, had been enormous.
“It's interesting because it's a gas-only play,” he commented, adding that there were no competing fields nearby either, nor competing liquids.
“As you de-bottleneck it, you get a lot of production, but it's a question of, are those marginal increases going to start to flatten out? And the answer is probably yes – that's generally what happens.”
The Haynesville, he said, was also a gas-only play in a key sweet spot, in the southern states of Louisiana and Texas. Rigs there could target gas or oil. “We've seen this, he said, “as rigs have left the Haynesville and gone off to other places.”
One of those places was the Eagleford, which Mr. Sikorski called interesting: “It's a mixture of gas and liquids, but there's a lot of liquids there and that's what they're drilling for, but to get production you've got to have a reasonably high level of associated gas.”
This, he said, was the issue – rigs going for drilling liquids.
“To get a rapid expansion of gas production again in the US, once some of the issues on de-bottlenecking are out of the system, you're going to have to attract rigs away from oil and get them back to gas, and that doesn't happen at $4; at the moment that only happens at around $6 or 7. So it is going to take an increase in pricing at the Henry Hub in order to get the kind of increases in production that would support those levels of exports which would be about 10 BCF/day,” explained Mr. Sikorski.
For pricing, he said, that meant liquefaction costs would be around $3-3.50 plus $1.50 for transport costs. “You're looking at around $10.50/MM BTU. That's about 65 pence/therm exchange rate for gas, so you're looking at that kind of gas being on the arbitrage in and around those prices.”
Mr. Sikorski termed European shale production a “thorny problem,” opining there were loads of problems surrounding it. For one, he said Europe didn't have any experience with onshore drilling for gas. “We don't have a culture, the lack of population density that would support it.”
Just take rig counts in Europe, which were around 10, 12, 13; this was in contrast, he said, to the 1,500 rigs in the US – big numbers.
“We have big offshore wells – that's what we do. We understand them. We don't have an onshore drilling industry in any European countries to speak of, that has to be built up and that takes time,” he explained.
This meant Europe would surely have to rely on international experience from the big service companies.
The acceptability of shale, he said, might be an even more insurmountable obstacle. Considering a number of factors, he said the UK and Poland had come out on top in terms of potentials for shale gas; there were others, but they had bans or moratoriums, which he said meant there either wasn't the political acceptance or the will to explore and produce in big parts of Western Europe.
Mr. Sikorski cited a BBC poll on the acceptability of shale in the UK, where there was very strong political support for shale. “For the first time ever, less than half of the population supports shale,” he said. “And really every time Cuadrilla, one of the main companies to do this, goes out and drills they have maybe 800 protesters showing up, protesting loudly, it gets on the 6 'o clock news and everyone says 'that must be terrible because there's everyone protesting against it.' So there's that ebbing away of general support, and local opposition, which is going to be very very difficult to surmount.”
As for the theory that support for shale might increase in the wake of the Ukraine crisis, which he said was a good argument, the opposition in the UK was local. “This is local opposition and that's geopolitics which are a long ways away from each other. I think it will take a very long time to get to a place where those kinds of geopolitical concerns can overcome local opposition: 'Please don't frack in my back yard,' and when you're anywhere in Western Europe, you're probably in someone's back yard.”
According to his organizations scenarios on total recoveries, he said that if commercial production were to commence in Europe by 2016, things ramped up at a rate similar to that of the US', then by 2020 Europe would produce around 35 BCM. But he said that was unlikely to happen with all of the issues faced by the industry.
“If we went half as fast we'd have 20 BCM, but that's way too optimistic, which is a way of saying that by 2020 you're going to have no impact – these are tiny, tiny numbers for a 450-500 BCM market. And if you look at it, most of it's probably going to be in Poland, a little bit in the UK and a bit in other parts of Central & Eastern Europe. Those are not big numbers and you put them out there and almost everyone in this room is thinking 'way too ambitious.'”
Piped gas, concluded Mr. Sikorski, would continue to be key for Europe.
Drew Leifheit is Natural Gas Europe's New Media Specialist.
*Editors Note: On June 12th Texas LNG LLC announced that it has received authorization from the U.S. Department of Energy (“DOE”) to export up to the equivalent of 100 Bcf/y (approximately 2 MTA) of domestically produced LNG to all existing, and any future, countries that have, or enter into, an FTA with the Government of the United States from its planned project at the Port of Brownsville shipping channel in Brownsville, Texas, USA.