March 6, 2017 § 1 Comment

A scant ten years ago this would not have been a discussion item.  Import of liquefied natural gas (LNG) was a sure thing.  A number of plants were sanctioned, and some constructed, and then the shale gale swept them away.  A number of these are being reincarnated into LNG export plants.  How many ought to be sanctioned by the federal government, and how soon, is part of the debate.  This debate is brought on now because the Trump administration is seen as fossil fuel friendly and so a loosening of LNG export is anticipated by some.

lng tanker

Gas is a regional commodity.  LNG is the only means of long distance oceanic transport.  Within a continent, pipelines are the mode.  Consequently, export from the US would entail gas in pipelines to Canada and Mexico, and LNG to other countries.  The former is not contentious, especially if NAFTA survives.  Mexico, in particular, is anxious to obtain low cost gas from the US, while developing their oil resources to offset the steep drop in the production of their giant Cantrell field.  The shale gas producers in Texas are happy to oblige.

The argument against export is that it could cause prices to rise.  The price in the US is artificially low due to supply consistently outstripping demand.  Weather causes fluctuations, but the price is remarkably stable when compared to the pre-shale-gas years.  Stability is friendly to capital investment.  Furthermore, US prices continue to be half that in Europe and a third of that in Asia.  This gives US industry, especially in the petrochemicals sector, an advantage.  However, modest rises (under fifty percent or so) in price would not affect this advantage, especially if oil prices stabilize above USD 50 per barrel.  The connection to oil is somewhat artificial (the markets are quite different) in that LNG is pegged to the price of oil, and LNG price is largely deterministic of gas price in the respective continent, in part because it is the marginal cubic foot.

Natural gas production in the US was 78.6 billion cubic feet per day (bcfd) in 2015.  It somewhat exceeded demand, causing the price to remain depressed, under USD 3.  An LNG facility consumes around 1.5 to 2.0 bcfd.  Today only one, owned by Cheniere, is actually exporting.  The Cheniere CEO was removed last year because he was considered too aggressive in expansion plans to build LNG export facilities.

Is LNG a profitable business?

A profitable LNG export business needs accurate prediction of raw material cost and delivered LNG price, over long periods.  The latter, as noted earlier, requires prediction of the world oil price.  With shale oil driven impotence of the OPEC, that is harder to predict.  For the former, what one needs is long term supply contracts.  Right now is a great climate for that.  Most natural gas being produced today is known as wet gas: methane with high concentrations of natural gas liquids (NGL’s) such as propane and butane.  This trend is due to the fact that on a calorific basis the NGL’s have higher value than methane and so there is more profit in wet gas.  NGL pricing is pegged to some degree to oil price, so some of that advantage is less now than it was in 2014.  Nevertheless, it is there.  As a result, dry gas (little or no NGL’s) properties lie fallow.  A very large and prolific field with this characteristic is the Haynesville.  It is close to the ports of the Gulf of Mexico.  An LNG facility in or near Lake Charles, LA, will have little difficulty in obtaining a long term supply of dry gas on very favorable terms.  Keep in mind that LNG requires dry gas.  It has no use for the bigger molecules.  Dry gas wells currently shut in will likely agree to long term low pricing just to get going.  In other words, the climate is decent for an LNG exporter to grow.  There is still the uncertainty of oil price, but at least the raw material cost could be controlled.

The national imperative

The LNG supporters say there is plenty of gas, go for it.  The detractors point out that the increased consumption will cause a rise in prices, thus hurting the citizenry.  The truth, as always, is likely in between.  Strictly by the numbers today, seven LNG facilities would add around 12 bcfd to the consumption.  That is close to 15% of production today.  Would that move the needle on price, possibly some, but not a lot.  But to the extent that the smart money would contract with shut in dry gas producers, the actual impact on price would be small indeed.  There is the matter of gas reserves.  Do we have enough for a long time?  There is a truism in the oil and gas business:  proven reserves in any new prospect area, and shale gas certainly qualifies, always rise with increased development.  Part of the reason is that proven reserves cannot be posted unless are they economically recoverable.  Field development increases the probability of economic recovery.  Accordingly, any reserves numbers today for shale gas are almost certainly underestimated.

An interesting twist comes from the oil sector.  Shale oil, because it is very light (smaller molecules on average), has significant associated gas.  In 2015 the associated gas was estimated at about 4 bcfd.  With some recovery in the price of oil, one would expect this to be higher going forward.  In other words, oil production alone will add significant gas to the production figures.  This, taken together with a potential revitalization of the dry gas economy, can likely support an LNG export business in the vicinity of 15 bcfd without impacting the price of gas to the point of damaging the economy.

Vikram Rao



  • parliamentofideas says:

    Demand will increase globally as distribution outlets increase from various nations.
    Pricing is a function of demand, transportation cost and viability of contract. Supply will rise to meet demand, as the supply of natural gas and associated NGLs is, today, essentially infinite. As price increases, supply will as well, along with global distribution functionality.
    The stranded gas markets of the past are quickly evolving into a global marketplace.
    Look for new dynamics, new demands and new supplies. Gas tankers will outnumber dry bulk and crude within a decade.
    John Graves
    Fracking, America’s Alternative Energy Revolution

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