The liquefied natural gas industry has seen major shifts over the last few years, with the evolution of new extraction techniques and the discovery of substantial gas reserves in places like Mozambique and Tanzania. But it could see an even bigger change in 2013, with the possible advent of LNG exports from the US, writes Paige McClanahan.
Given that US gas is currently selling for a fraction of the price of gas in Asia and Europe, a flood of American LNG exports could impact the gas industry around the world.
But whether the US government will actually permit LNG exports is still a matter of debate – and a heated one at that. Ever since producers in the US started extracting natural gas from shale beds in commercial quantities, the country has experienced a glut of natural gas, which has driven down the domestic price of the fuel.
Many in the US gas industry have argued that some of the domestic gas resources should be shipped overseas as LNG, but not everyone agrees. Opposition has come from a number of sources: the chemicals and fertiliser industries, which are benefitting from cheap domestic gas prices; environmental groups, which oppose the hydraulic fracturing (“fracking”) extraction process; and some politicians and consumer groups who want to keep gas prices low for regular household users in the US.
All of those groups have directed their arguments at the US department of energy, which is responsible for issuing export permits for LNG. Before taking any action, the department commissioned a report on the subject, which was carried out by NERA Economic Consulting, an independent firm. The report, which was made public in early December, provided solid economic evidence in favour of allowing US LNG to be shipped overseas.
“[The report] basically said ‘the more the merrier,’” says Anthony Yuen, an energy analyst for Citigroup Global Markets. “The more [LNG] exports you have, the better the net economic benefits.”
LNG exports could boost the US economy by as much as US$47bn by 2020, the report said. It also found that shipping gas overseas would have a relatively minor impact on domestic prices of the fuel.
Soon after the report was released, editorials in both The Washington Post and The New York Times argued in favour of allowing exports. “The United States has traditionally maintained tight control over the export of natural gas,” the editorial board at The New York Times wrote on December 15. “But those restrictions have become anachronistic.”
US industry groups have proposed 15 new liquefaction terminals; four of those are up for review by the department of energy in 2013. But it remains to be seen whether US officials will take the recommendations of the NERA report to heart.
“I think the decision won’t be purely an economic one,” says Sandra Sinclair-Hughes, a partner at Clyde & Co. “I think politics, or geopolitics, will play a role.” The department’s decision may hinge, she adds, on whether the LNG would be exported to countries that have signed a free-trade agreement with the US. The quantity and pace of US shale gas extraction over the next few years would also likely figure into the calculations, she explains.
What seems clear is that the NERA report has shifted the debate on LNG: Exports of American gas are more likely now than they were before the report was released.
If the US were to begin shipping its gas overseas in significant quantities, what would that mean for the global LNG market? The answer is far from clear. But producers in other parts of the world will be watching the US closely, since a flood of US exports could have a significant impact on LNG prices around the world.
At the moment, prices for natural gas vary hugely by region: In the US, gas prices are very low, due in large part to the shale gas revolution. Currently, US prices are hovering between US$3 and US$4 per million British thermal units (mBTUs); in Europe the price is closer to US$10 per mBTU, while in Asia it is roughly US$15.
“If the US were to export, that should introduce US Henry Hub gas pricing into the [global LNG] market,” says Yuen of Citibank. “US gas is pretty low in price, so even if you add in transportation costs, global LNG prices should still come down – delivered costs would be lower. So US gas entering the scene could be a threat.”
LNG projects tend to be heavy on infrastructure, and they generally entail huge capital investment well before any cash can be earned from the sale of the gas produced. Thus, a drop in gas prices could affect the viability of new LNG developments, says Jeffrey Barratt, a senior banking partner at Norton Rose: “In order to recoup that capital expenditure, you have to have a reasonable price for your offtake.” And the possibility of US exports could cast serious doubt on any price predictions.
“I think every single potential or current exporter of LNG will need to consider [the potential impact of US exports],” says Sinclair-Hughes of Clyde & Co. “Particularly as we move toward 2015-2020, when a lot more capacity is expected to become available in terms of supply.”
New projects elsewhere
As officials in the US debate their country’s LNG export policy, gas producers in other parts of the world have been busy discovering and developing new reserves.
“Recently there have been substantial gas discoveries, not only in the US with the shale revolution, but also East Africa and in the eastern Mediterranean and elsewhere as well,” says Yuen of Citibank.
Projects in East Africa – namely Mozambique and Tanzania – have grabbed headlines over the last year for their impressive size and scope. More than 100 trillion ft3 of gas has been discovered off the coast of East Africa, all of which has been found in the last three years. Analysts say that both Mozambique and Tanzania have the potential to become major suppliers in the global LNG market in a decade’s time. But there are a number of hurdles that will have to be overcome before that can happen. The infrastructure costs are enormous, and political risk is relatively high.
Meanwhile, producers in Australia – which is currently the world’s second-biggest source of LNG, after Qatar – are pushing ahead with new and ever-larger projects. Royal Dutch Shell is developing the world’s first floating LNG liquefaction facilities off the coast of Australia. Prelude, as the US$12bn project is being called, is currently in the early stages of construction. By the time it becomes operational in 2016 or 2017, Prelude will be the world’s biggest floating vessel.
Such floating facilities could become more attractive in the years ahead, says Sinclair-Hughes of Clyde & Co.
“The position generally is that they will be cheaper to build,” she says. And there are other potential benefits as well: “There are major socio-political issues and regulatory issues which might apply to shore-based infrastructure, but may not necessarily be an issue when you are in a remote offshore location.”
New LNG projects have also been proposed in British Columbia, aimed at the gas-hungry Asian markets. Joe Oliver, Canada’s minister of natural resources, said in September that the country, currently the world’s third-largest producer of natural gas, hopes to eventually export nearly 255 million m3 of gas per day, more than double the current rate. But the new projects are still looking for investors, and they will have to compete with suppliers in Australia, and potentially the US.
Meanwhile, Qatar continues to be the world’s biggest producer of gas, churning out more than 100 billion m3 of natural gas in 2011. The tiny desert nation is home to the world’s third-largest reserves of gas – some 25.4 trillion cubic metres – after Russia and Iran.
In the UK, natural gas production recently received a boost. On December 13, the British government announced that it would allow fracking on UK soil. Cuadrilla Resources had suspended its operations in Lancashire after a minor earthquake in Blackpool. That project should now come back online, and dozens of other sites across the UK could be licensed soon.
Long-term supply and demand
All of those new LNG developments are feeding into a major shift toward gas worldwide. Global gas production has grown significantly in the last decade, according to the International Energy Agency. Gas now accounts for a larger-than-ever share of the global energy mix: 21%, up from 16% in the 1990s. Natural gas is the only fossil fuel that is expected to increase its share of energy demand in the years ahead.
“Gas demand is increasing in a number of places, except Europe,” says Yuen at Citigroup. Asia – particularly Japan and Korea – continue to be the world’s biggest gas consumers, but demand is growing in places like Brazil, Argentina, and the Middle East, he adds.
Most of those countries are looking to use gas for electricity generation. At the moment, gas is cheaper than both coal and oil, and it is also cleaner-burning. The latter aspect appeals to countries that are looking to manage their pollution levels and greenhouse gas emissions. They see gas as a relatively clean – but still very reliable – source of power.
“The reality is that wind power and [other] renewables are an important source of energy but you have to have a back-up source of electricity too,” says Barratt of Norton Rose.
But even as demand for natural gas is soaring, the supply side is keeping up – and then some.
“It is expected that the supply will exceed the demand certainly from 2015 onwards to 2020 – if all of the current projects that are already underway or are being planned … do come on-stream,” says Sinclair-Hughes.
If the supply of natural gas overtakes demand, that could lead to a fundamental change in the way that LNG is priced. Outside the US, the price of natural gas has traditionally been linked to the price of oil. That set-up works well for producers, and it makes sense if gas is still seen as a “bridging” fuel between dirtier fossil fuels and renewables. But in 10 years’ time, if gas fully comes into its own, buyers might be able to start naming their price.
“The fact that there is, based on current planned export projects, expected to be an oversupply… might facilitate development of a freer LNG market,” says Sinclair-Hughes.
“The question always is – and this is what everybody’s been asking for many years – will LNG at some point evolve into its own distinct pricing market, or will it always be linked to, or remain a sub-market of, other energy markets?”
While it may be too soon to make any sure-fire predictions on that front, the answer to that question may well hinge on what happens in the US in 2013.