Uneven Energy Transportation Infrastructure Delaying Full Global Benefits Of Shale Gale

July 2013, Vol. 240 No. 7

Erin Nelsen Parekh, Associate Editor

Increased natural gas utilization, and to a lesser extent oil development, is being hampered by a lack of market liquidity and spot pricing for the commodities both domestically and abroad. Roadblocks include insufficient pipeline connectivity in North America and into Europe, a dramatic lack of international energy infrastructure in Asia, and the regulatory and environmental delays that prevent the necessary investments from going forward.

These roadblocks were a recurring topic of discussion at the 2013 IHS CERAWeek conference in Houston, earning comments from energy professionals from exploration, production, pipeline, manufacturing, LDCs and power generation disciplines.

North America

In North America, Al Monaco, president and CEO of Enbridge, Inc., noted huge price differences for oil and natural gas between the wellhead and the refinery, including a $36 per barrel difference between prices in Alberta’s oil sands vs. on the Gulf Coast, where, he said, there should only be $8-10 difference due to transportation costs if market connectivity were good.

Monaco noted that 99% of Canada’s crude oil and 100% of its natural gas exports go to the United States, and in terms of market diversification, this gives Canada very few options. He said Enbridge was waiting on regulatory decisions expected by the end of the year for a pipeline project to move crude off the west coast of Canada, presumably the Northern Gateway that would connect to a marine terminal at Kitimat, giving Canada access to Asian customers.

“I don’t care what kind of business you’re in, having access to only one market doesn’t make a lot of sense,” he explained. In the next 20-30 years, Monaco expects an interconnected global market for oil and gas.

However, he also expects to see other changes in the status quo before that comes to pass.

“The public’s expectations on how we develop this infrastructure have changed dramatically over a very short period of time.” Energy companies are facing a higher standard in environmental, safety and community outreach efforts. Monaco said the industry should welcome this challenge, but warned that across-the-board resistance to energy development could become a major issue.

“As we’re witnessing today with the opposition to projects, that can stretch things out a lot; it could exacerbate the price disconnects,” he said.

The lack of even distribution results in less gas used by end users, according to several speakers in positions to affect the decision. Power generators were unconvinced that the current low prices (averaging $3.57/MMBTU at the Henry Hub that week) would remain stable, despite the abundance of domestic gas made available by unconventional recovery methods.

James Rogers, chairman, president and CEO of Duke Energy, said, “I like to kind of hijack Ben Franklin, who used to say the only two things in life that are certain are death and taxes. I would add to that the volatility of natural gas prices.”

John Russell, president and CEO of CMS Energy Corporation and Consumers Energy Company, agreed. “Once [power generation] all goes to natural gas we’re going to have problems. The volatility will come back, because the second [most] volatile commodity in the world beyond electricity is natural gas.”

The electricity executives reported feeling an economic push to move to more gas generation, due to cheap prices, but were concerned that they would be left in untenable situations when prices swing again. They also pointed out that for manufacturers, power plants and other end users, natural gas prices vary, based on pipeline location and allocation.

Gas generation customers often don’t have firm rights to pipeline capacity. As IHS Senior Director Edward Kelly put it, “The Henry Hub price is wholly different from gas at the pressure you need it, when you need it, and where you need it. And those details contain a lot of devils that the two industries are trying to work out right now.”

In Europe, the difficulty is in getting a reliable supply of gas, according to the chairman of the board of directors for Wintershall GmbH, Rainer Seele. He criticized Germany’s energy policy on a number of counts, including a green initiative that actually resulted in a rise in emissions after Germany’s nuclear power generators were shut down following the Fukushima disaster and coal usage went up to compensate.

“I expect natural gas consumption to stagnate in Germany and in Europe in the coming years. This stagnation will be accompanied by a consolidation process in the gas industry and structural changes to the market,” he said, predicting the withdrawal of integrated natural gas companies from gas transport.

As an example of the contributing problems, he held up a connecting pipeline to the Nord Stream pipeline into Germany built by Wintershall and Gazprom. The German regulators required Gazprom be allowed to use 50% of the capacity of the line at maximum. However, according to Seele, the lack of contracts for the other 50% means the pipeline is half empty, while Gazprom, eager to provide more supply, is prohibited from booking the remaining space.

Although he said he was in favor of any energy source into the continent, Seele believes the proposed Nabucco pipeline was burdened both by lack of will among countries that might invest in it, and lack of participation from gas-producing countries. Seele discussed the South Stream pipeline, in which Wintershall has a partnership interest with Gazprom, with conviction, and cautioned against an anti-Russia energy position.

Acknowledging the trouble with transit through Ukraine in 2006 and 2009, he asked, “Does natural gas from Iran or the Caspian region offer greater supply security to Europe?” and affirmed that the South Stream would prevent any future supply disruption.

Seele was not optimistic about any reversal in the decreasing domestic energy production in Germany and the rest of the continent. He noted that fracking had the possibility to become the next environmental bugbear of German culture. “We are a long way off a shale gas turnaround like the one we are witnessing here in the United States.”

In Asia, meanwhile, high LNG prices are luring investments but spot pricing seems destined to continue. Joseph Geagea, president of Chevron Gas & Midstream, remarked that while Europe does not have full infrastructure flexibility, it does have several sources of supply in North Africa, Russia, Norway and the United Kingdom, as well as international transport within the continent.

But in Asia, “very few pipelines go across borders; clearly there’s no alternative of indigenous supply. We’ve all heard about the increasing demand that these economies are facing, and there’s no liquid spot market to speak of as we’ve seen today. In fact, there are not enough ships to bring supply to create that liquidity from here in the United States or Europe.” Without infrastructure and liquidity, he said, there can be no Asian hub pricing, and rates for LNG and natural gas will fluctuate based on the country of sale.

Transportation barriers in this case are partially a reflection of a lack of cooperation between countries. “Every country today in Asia has been acting in its own national interest, and that doesn’t lend itself to liquidity and an increase in trading among nations. So we need to see some of those things actually taking place: governments coming together, sharing infrastructure, more spot cargoes being traded, before we can declare that there’s actually an Asian hub on which everybody can base their pricing.”

Geagea cautioned that the surge in interest in building LNG plants will not necessarily bring the market to equilibrium either, even with increased non-free-trade permits in the United States.

“The world needs much more than the United States can supply. I have seen predictions that about 50 million tons per year of LNG could realistically be exported from the United States in the next decade. If true, that would only represent 10% of forecast world LNG demand.”

That, of course, represents the possible output. Geagea also reminded the audience of the heavy investment required to reach that point. “LNG projects are massive, complicated and very expensive. Even in less contentious environments, building LNG facilities does take time. For the last 35 LNG projects developed globally, it took an average of over 18 years from discovery to bring that supply to market.” Although development times are coming down, LNG facilities are not a means for quick responses to market imbalances.

Whether barriers to transportation in the worldwide gas market go up or down may have drastic consequences for the shape of the next few decades in geopolitics. With global energy demand projected to increase 30% by 2030—twice the rate of expansion since the 1980s—Geagea advised caution to those who see new sources of supply as ample reason for optimism without worrying about production and transport.

“It is important not to underestimate the impact of regulatory and other hurdles… What is proposed is not always what is developed.” Without the right infrastructure in place, he said, “many countries will not be able to participate in the golden age of gas.”

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