US shale gas going nowhere fast as LNG

The idea that a wave of LNG produced from US shale gas fields is ready to crash over Asian consumer markets, disrupting traditional supply routes and oil-linked pricing mechanisms doesn’t hold much water with producers in the Middle East, Australia and Southeast Asia.

“Reality says that there will be a finite amount of gas out of the US. The amount of gas coming out of the US, in and of itself, if it’s in the 30 million-50 million mt/year range, is not enough to fundamentally change the market,” said Woodside Petroleum CEO Peter Coleman last week at the World Gas Conference in Kuala Lumpur, Malaysia. “What it does is provide another supply source and more head-to-head competition … but it’s not going to fundamentally change the market.”

The Woodside chief — as head of a company operating LNG plants that ship 20.6 million mt/year to Asia — may have a vested interested in propagating that viewpoint, but his was not an uncommon sentiment at WGC 2012.

It would be reasonable in the long term to expect some North American LNG to meet a portion of the Asian demand, but it is likely to be more of a niche source of supply, said John Harris, director of global gas group at IHS CERA.

“A majority of [Asia’s] supply is and will be met from Malaysia, Indonesia, ME, Australia [and] Brunei,” he said.

Others that held similar views included Total CEO Christophe de Margerie; Santos vice president for Western Australia and Northern Territory, John Anderson; Rasgas Managing Director Hamad Rashid al-Mohannadi; and other analysts and market observers attending last week’s gas industry gathering.

As many of them pointed out, while there are a dozen or more potential export projects on the drawing board, from the US Gulf Coast and up the eastern seaboard, to a handful along North America’s west coast, only one is anywhere close to going ahead.

That’s Cheniere Energy’s Sabine Pass facility, due for an initial startup in 2015 with a final capacity of about 2.2 Bcf/day or 16.5 million mt/year by 2017. Like many of the proposed LNG export projects in the US, Sabine Pass — in the days before the US shale gas revolution — was originally planned as an import terminal. Unlike the others, however, it has already received necessary approvals from both the US Department of Energy and the US Federal Energy Regulatory Commission.

Cheniere also has inked long-term LNG sales deals for 16 million mt/year, or more than 90% of the terminal’s planned export capacity, with UK-based BG Group, South Korea’s Korea Gas, India’s GAIL, and Spain’s Gas Natural Fenosa.

While the into-Asia price of about $11-14/MMBtu that most analysts say would result from Henry Hub prices in a $2-5/MMBtu range would seem to give such US-sourced LNG a great advantage in Asia — where long-term contract sales are running $17-18/MMBtu or higher — there may be too many problems with the US gas to make US-Asia a major trade route.

“Where we are on the market place today is that Henry Hub is at low levels, so people feel good about the arbitrage difference between where Asia is and where Henry Hub is,” said Woodside’s Coleman. But “$2.50/MMBtu is not a sustainable Henry Hub price to maintain supply into the market, so over time you’re going to see the Henry Hub prices creeping up.”

Also, US consumers —  many of whom will be voters in the upcoming presidential election — like their gas affordable and cheap, and anything seen to be encouraging the development of an export market, and threatening low, gas-fired heating, cooking and utility costs, could be a political liability.

Other disadvantages faced by companies hoping to export US shale gas as LNG are high project-labor costs, greater distance to the main consumers in Asia and delays in getting through the Panama Canal, as well as higher annual capital costs due to the need to keep drilling shale gas wells.

“I don’t see this current arbitrage situation lasting into the long-term,” Coleman said. “That’s why we believe the most likely volume that will come out of the US — as a maximum — will be only capacity that’s related to existing brownfield [LNG import] sites that are being converted to LNG export.”

To build new greenfield LNG export sites in the US is going to require substantial investment, and that is where people will pause, Coleman said.

“The challenge is that you need to invest every year because the output decline of a shale gas well can be quite significant in that first year, so you have to keep going. So the question is, once we get through this initial hump or bubble, what will that [US] supply turn out to be and that cost of supply? … My guess is that it’s going to be a number that will make it marginally attractive,” he said.

Platts