Solid Case for US LNG...Or Not?
Thank heavens the natural gas industry is capable of changing course, according to Jean Abiteboul, Senior Vice President, International, Cheniere Energy Inc., who spoke at the European Gas Conference in Vienna, Austria about the future of global LNG movements, and how his company hopes to capitalize upon them.
Mr. Abiteboul recalled, "About six years ago I was supposed to deal with LNG imports to the US market - at that time the US was seen as the next huge market for LNG importation. And everyone knows what happened then - the story of shale gas. Everything changed and it happened very fast."
He showed a chart which depicted US production growth versus demand growth, saying that within the next 3-4 years the US would be a net exporter of natural gas. Proved non producing reserves, said Mr. Abiteboul, were roughly 15bcf/day of LNG exports for 20+ years.
"The limitation of LNG exports will not come from the reserves - there are plenty of reserves - the limitation will come from world energy markets or from the lack of liquefaction infrastructure in the US, or the transmission system," he said.
He questioned whether or not it was sustainable to produce gas at the low Henry Hub price of $3.50/MMBtu. "The answer is that, today rigs are shifting to the associated oil and gas fields, gas is a by-product. Theoretically you could sell gas at a zero price."
Associated gas at the major oil plays, he showed, was producing 12bcf/day.
"Today the US is flaring gas," he stated, mentioning an article about the subject in the Financial Times which wrote that gas flares over America could be seen by satellite. "This is gas which could be sold at any price."
Mr. Abiteboul said the industry knew about shale gas 10 years ago but didn't believe it was economically viable; efficiency improvements had occurred in a very short period of time, showing a huge growth in productivity, and rendering reserves economical. Within just three years, average production rates had grown by nearly 800%.
He commented, "If you take the six big shale gas plays - Barnett, Woodford, Fayetteville, Haynesville, Eagleford, Marcellus - you can see that production has been multiplied by seven within five years starting in 2007."
Of European natural gas supplies, he said: "We believe that in 2025 there will be a lack of supply of more than 10bcf/day, which takes into account all of the projects in Australia which have been decided, but does not take into account any US projects."
Most LNG projects being launched were in Australia, he noted, with the exception of Cheniere's Sabine Pass project, which was under construction.
A huge price spread existed for global LNG, he said: Nymex at $2.6/MMBtu, NBP at $9/, the Japanese price at $16/ and he European gas contract at around $11/.
This, concluded, revealed the economics for selling US LNG.
"If you assume Henry Hub is at $3/MMBtu, add to that liquefaction costs of $3/MMBtu, the shipping costs can be $0.75-$3 and the cost goes between $7-$9.45, and when you compare that with the regional market prices you get a gross margin of $4.30-$7.80.
"So in today's market conditions, US LNG would be competitive in all world markets. You can argue about whether or not Henry Hub will remain at $3, or whether long-term prices will remain at this indexation; of course all of these things are moving and can change, but still at the beginning of the story we have a very significant margin to cope with these variables."
According to a latest, official forecast he cited, the production of unconventional gas in the US was set to rise to 78.5 bcf/year by 2025. "If you compare that with consumption, you can see that US will be a net LNG exporter in 2016, when Sabine Pass will be in operation, and will be a total natural gas net exporter in 2020, taking into account the imports from Canada and exports to Mexico."
Still, Abiteboul mentioned the debate in the US over LNG exports, which revolved around three aspects: exporting more LNG meant more hydraulic fracturing, which some thought was not good for the environment; an economic argument that if the US exported it would increase natural gas prices in the US; and potential erosion of America's distinct industrial advantage because of low natural gas prices.
He reported that the US Department of Energy had requested an independent consultancy to conduct a study to determine whether or not it would be good for the US to export its gas.
"The short conclusion is, when the energy exports begin, the consequences on the domestic price in the US would be negligible, "
Among his conclusions he showed that there would be impact on both prices in Asia and in Europe; value destruction for Qatari, etc.
Showing a model of Sabine Pass, which could be used for both export and import, Mr. Abiteboul said Cheniere had signed four long-term contracts, one with BG Group. Of the terminal, he reported, "We are shifting this facility into a liquefaction facility - it will be able to do both (LNG import and export) if the market changes again.
"US gas reserves are huge, the margins for producing those reserves are large, especially because there is plenty of gas associated with oil," he explained. "The price and strategy impact of US LNG exports on the world market will be pretty much more significant than the actual market share of US energy."
Still, Ruud Weijermars, Alboran Energy Strategic Consultants, questioned if US domestic shale gas supply was secure. He asked, "Can we in Europe bank on it?"
He noted that the shale gas revolution in the US had added volume to natural gas resources, a "spectacular explosion," as reserves were set to double.
However, he described the "bleak reality of the carrot/stick operators" working in shale gas production in the US. "They are producing but in a landlocked market where the price has collapsed."
Mr. Weijermars showed the transactional/transnational price gap and questioned whether US gas would make it more liquid.
He noted new US Securities and Exchange Commission (SEC) rules, according to which if gas prices went down, proved developed and undeveloped reserves of natural gas had to be downgraded. "That's very dramatic, because you lose collateral," he explained, noting that the gas rig count in the US had been going down very steeply for Chesapeake Resources and other operators in the US shale gas plays.
"More well length is being drilled with the same rigs, but the fact that the gas rig count is down also means that the well count is down and that will have an effect on gas output," he stated, showing how such wells were uneconomic given the low Henry Hub price.
Weijermars posed the questions: "Will this dramatic shale gas boom continue? Will it make the rest of the world rich, happy and energy secure? Yes or no?"
And would the US become a net exporter of LNG by 2016?
The most accurate LNG model, according to him, was from the North American Energy Modeling System (NEMS), which was released by the Energy Information Administration (EIA). He noted that there was no US natural gas production decline in their forecast.
"The biggest uncertainty they can see in their own assessments is that natural gas is very volatile in its behavior; their prediction of gas prices, which they predict separately, has only been correct in a 15% bandwidth in the last 25 years.
"So, the truth is, there is a very strong energy security bias, either in the NEMS, in the people who calculate it, or both."
He noted that shale gas developers had always been using such upbeat US natural gas prices when making their final investment decisions, making gas unprofitable for the operators.
"We believe the impact of economic realities has been neglected in the North American modeling systems, and no on in particular is to blame - that's just the kind of culture that has developed around shale gas," said Mr. Weijermars whose organization had come up with some different scenarios, one of which he said led to the decline of gas output.
"This is a very dramatic conclusion, because it says there will be very little gas to be exported from the US as LNG, apart from existing contract obligations."
While Mr. Weijermars said he hoped the most optimistic scenario would be true, the true future gas supply of the US could not be discerned via very simple models. He concluded that there would be very little gas left to export.
David Koranyi, Atlantic Council Patriciu Eurasia Center, also weighed in on the prospects for the US exporting shale gas via LNG.
He said that the huge difference between the US Henry Hub price for natural gas and the price in Asia meant that US LNG exports were a "no brainer."
But there were still some serious hurdles, for example in the political context.
Mr. Koranyi recalled: "No one dared to touch this topic before the US presidential elections (last year). According to the Department of Energy, a public comment period will end this February, and they've already received 250,000 comments from all over the US: from citizens, congressmen, the petrochemical industry... So clearly this has become a very controversial domestic issue as the cheap price of natural gas is a political boom.
"It has been a story about job creation, economic competitiveness, and re industrialization, so from that perspective it's not going to be easy to turn the narrative around," he explained.
There was also the environmental angle, according to Mr. Koranyi, who reported that out of the 250,000 comments around 200,000 of them had arrived from the Sierra Club, which had encouraged people to pipe up who were against shale gas.
Not to mention that many were pointing out, he said, the unique chance that the US had to establish energy independence by, for example, using cheap natural gas to transform the transportation fleet.