To Import Less Oil, U.S. Must Export More Gas

Facing a supply glut, in recent years natural gas drillers like Chespeake Energy, EOG Resources and SandRidge Energy have all shifted investment dollars away from gas in favor of higher-priced oil. That’s spurred a boom in new oil plays like the Bakken of North Dakota and the Eagle Ford shale of south Texas. As a result, U.S. crude oil production was up 150,000 barrels per day to 5.51 million bpd last year, despite downturns in Alaska and the Gulf of Mexico. The Energy Information Administration forecasts Lower-48 growth of 230,000 bpd this year.

But ironically, going after oil instead of gas isn’t helping reduce the gas glut at all, because in virtually every oil field you’ll also find associated gas. With the price of oil so high the drillers are incentivised to give away the gas for free and just make money on the liquids. In the Woodford shale of Oklahoma, Continental Resources says the gas they produce is so “wet” with other liquids like butane and propane that they can get $8 per mmbtu, far more than the going rate of $4.32 for dry gas.

Thus, this drilling for liquids helped U.S. gas production hit an all-time record in 2010 of 26.8 trillion cubic feet.

It feels like a bait and switch. America needs to reduce its reliance on foreign petroleum, but that won’t happen without further boosting our already ample supplies of gas. So to import less oil we’ll need to export more gas–at least until electric utilities, manufacturers and car makers build enough new plants, factories and natgas-powered cars to soak up the excess.

The U.S. is at last moving in that direction, with the Department of Energy in recent weeks approving the proposal by Cheniere Energy  to turn its little-used liquified natural gas import terminal at Sabine Pass on the Louisiana coast into an export terminal. The company aims to send out its first gas in 2015–that is if it Chief Executive Charif Souki can manage to raise the $8 billion or so Cheniere will need to build a liquefaction plant, let alone complete it on time.

If it works it will be a huge turnaround for a company that I heralded back in 2005 for being the first to navigate the nimby issues involved in building an import terminal. That was back when the fear was that the U.S. would soon run short of natural gas. Then came the shale gas boom.  Cheniere shares topped out at $40 back in 2007, then fell to $1.25 in 2008 and are at $8 today.

Cheniere’s not the only company looking to export LNG. Southern Union and BG Group are looking to do the same from their Lake Charles import terminal, while on the Texas coast, Freeport LNG wants in the game as well.

Gas exports can’t come soon enough for America’s natural gas drillers, looking for something, anything to goose demand. Yet the Industrial Energy Consumers of America, lobbyists for manufacturers of plastics, cement, paper, steel, chemicals and such, sought to block Cheniere’s export approval. They want the gas to remain in the U.S. to provide cheaper electricity and cheaper feedstock for making chemicals and plastics. They say that shipping gas overseas will only hurt Americans by making it more expensive at home.

This makes some sense, but the price impact is unlikely to be enough to derail LNG exports. A recent study by Navigant Consulting found that if Cheniere manages to send out the full 2 billion cubic feet per day that it has approvals for, the effect would be to raise the domestic price of natural gas in 2015 by about 35 cents per mmBtu. That’s not insignificant, and would be an 8% increase on current gas prices of $4.32 per mmbtu. But looking deeper

at Navigant’s analysis, and you find their prediction that if development continues on U.S. gas fields between now and 2015, the price of natgas will collapse to $3.29. Under that scenario, the 35 cent increase would boost prices to just $3.64 per mmbtu, still more than 15% below today.

Although Navigant did its study at the behest of Cheniere, Managing Director Gordon Pickering says, “We pride ourselves in being independent, and it’s important we don’t bias our results. Besides, we have more clients on the other side, like electric utilities.”

Pickering says his analysis was even conservative in that he assumed drillers would not find any new natgas reserves between now and then — highly unlikely. So prices could theoretically get even cheaper.

Frankly, if the U.S. doesn’t export North America’s surplus gas, then Canada likely will. Apache Corp., with partners EOG Resources and Encana, is moving forward with plans to build an LNG plant at Kitimat in British Columbia. It would liquefy gas from the Montney and Horn River shale plays (where ExxonMobil is a big landholder) and send it to Asia.

Another U.S. gas hoard ripe for export is on the North Slope of Alaska, where for decades operators led by BP have been reinjecting associated gas recovered from Prudhoe Bay and other oil fields back into the ground. There’s an estimated 40 trillion cubic feet of gas there, but no way to get it to market. One option that looks increasingly viable is to pipe the gas across Alaska to the Kenai peninsula, where ConocoPhillips and Marathon Oil operated America’s only LNG export terminal for four decades, until it was mothballed last February due to declining gas supplies.

The wildcard in the LNG export derby? Fracking. If environmental paranoiacs can convince politicians to limit or ban the use of controversial hydraulic fracturing techniques required to drill up shale plays, then those excess gas supplies could quickly disappear and prices would soar. That would crush a lot of dreams among gas drillers, but would make Cheniere’s original plan to import gas turn out right after all.

Forbes