Liquefied natural gas, LNG, as a product is cold – minus 162 degrees centigrade. Commercially, it is hotter than a 4th of July firecracker! In mid-September the federal government issued a conditional license to a fourth company, Richmond, VA-based Dominion Resources, to sell up to 770 MMcf/d of natural gas for 20 years to any buyers abroad including those without Free Trade Agreements. The gas will go mainly to Asian markets.
Earlier the Department of Energy awarded licenses to a Lake Charles, LA project and one on Quintana Island to Freeport LNG. Houston-based Cheniere Energy got a license in 2011 for its Sabine Pass facility. The Dominion facility is located in Cove Point, MD. This latest license raises the total allowed for export to about 6.4 Bcfd, nearly 10% of the total gas sold per day in 2012, approximately 70 Bcf/d.
Exporting domestic natural gas will help in two ways. Production is undergoing a renaissance – getting natural gas from shale reservoirs and horizontal drilling have revolutionized the industry. Where a decade ago the decision was made to build a large LNG importing infrastructure to meet the needs for domestic gas, these developments have totally reversed that plan.
Production ability is well above what is needed for the foreseeable future. Economically produced gas supplies are plentiful and make an even stronger argument for the clean-burning, low polluting fuel as the cornerstone of the energy business. While supply has risen, demand has not grown significantly, thus impacting prices and driving down the economics of production. The lowered price raises the risk of lowering gas exploration and production.
Even though natural gas prices reached exceeding low prices about a year or so ago, demand only increased slightly as shown in the table following:
Year Gas Consumption, Bcf % CHGE
2009 22,910 -1.6
2010 24.087 5.1
2011 24,385 1.2
2012 25,502 4.6
For the first seven months of 2013 consumption has run 0.6% higher than 2012.
Prices, which have dropped dramatically during this period, were:
Prices delivered to customers, $/1,000 cu ft
Year Spot City Gate Industrial Electric
2009 5.24 6.08 5.33 4.93
2010 4.37 6.18 5.48 5.27
2011 4.00 5.63 5.11 4.89
2012 2.75 4.73 3.86 3.52
Seven months data
2012 2.45 4.69 3.67 3.27
2013 3.74 4.85 4.71 4.58
Foreign natural gas prices are much higher than domestic prices. Asian prices are tied to crude oil while European markets are tied to European suppliers of which Russia is the largest. According to Platts, Asian gas prices fell from September to October 4.8% to $15.235/MMBtu. Because of demand, August and September 2013 prices were up slightly.
European spot prices are considerably lower with current LNG prices at $11-12/MMBtu. This still leaves potential increased profitability when U.S. gas is about $3.50/MMBtu and liquefying the gas, transporting and regasifying at the destination runs $4-7/MMBtu.
While the latest approval moves the total close to the anticipated levels, there are still approximately 20 other applications for export licenses. Each application is reviewed on a case-by-case basis. The administration has warned that if exports lead to significant price increases in domestic gas prices, licensing will be stopped.
Since natural gas is used as a fuel and feedstock in many areas, U.S. manufacturers that use it have enjoyed a significant advantage because of the low prices of recent years. The pressure against exports has come from these large users who fear losing access to cheap gas, Some U.S. industries have literally come alive because of the advantage those prices have given them as they compete in global markets.
One group’s boon is another’s disaster! The relatively low prices seen a few years ago and not too improved now are causing a cutback oin exploration and production. Some feel a wellhead price of at least $5/MMBtu is required for producers to continue to develop new shale-driven supplies. When gas prices were really low a year or so ago, the value of the contained liquids in the gas stream kept production going. These prices have moderated and now prices need to rise to keep producers going.
On an energy basis – million Btus – U.S. gas, now about $3.50/MMBtu, is priced very low to crude oil. Crude selling at $100/barrel is the equivalent of natural gas at $17.25/MMBtu. Since Asian gas is pegged to the crude price, the price advantage in making chemicals like ammonia, urea, plastics, etc. is a tremendous advantage to U.S. producers. Thus the concern if gas prices increase because of exports and the reason why the government is selective in granting export licenses.
The government commissioned a study of U.S. gas prices and the potential increase from exports. The analysis concluded that with current gas availability, exports in the planned range would have little impact on raising domestic gas prices with consumption as it is now growing. There are some other marketing changes that could affect gas marketing and pricing.
Natural gas has done little so far to penetrate the transportation market. Only some large interstate trucking companies, commercial fleets and city buses have switched to compressed natural gas (CNG). With distillate fuel oil prices about $4/gallon today, gas prices would drop the fuel cost to about $1.97/oil equivalent. More fleets are now looking to converting to gas because of the savings.
Another opportunity to grow demand comes from the many large, oceangoing ships that may switch to LNG. Dollars are the main reason but there is another benefit. Environmental rules for ships entering U.S. waters call for lowered sulfur emissions; meeting this demand with changes in the fuel oil specifications will be costly. Natural gas can help meet these requirements while helping save money.
Yet another source of gas demand in the U.S. came in September when the Environmental Protection Agency released its new rules for coal-fired power generation plants. Where earlier rules mostly affected new plants, these new rules will also go after existing facilities. The full impact is unclear as the new rules will likely be tested in court since they essentially will kill coal as a power generation fuel – 40-50% of electricity comes from coal.
No question, the need for additional liquefying facilities exists, whether its for export or direct consumption. The sites built to receive LNG and regasification will have some value but the costs are still high for new LNG-making facilities. According to the magazine, The Economist, costs for new facilities have been rising sharply. To build a liquefaction plant in the 1980s cost about $350/ ton of LNG a year; now it costs closer to $1,000/ton though the cost in the early 2000s was about $200/ton because of technology improvements.
The other capital expense in exporting LNG is ships. According to the The Economist, prices are not cheap and are about $200 million per tanker.
The Cheniere export agreement offers a good example of the business. Cheniere will sell U.S. gas to traders at Henry Hub prices with a 15% markup and liquefaction costs of $2.15/MMBtu. In addition, there will be transportation and regas costs. Total might be around $10/MMBtu delivered, which is still good compared to oil-indexed gas of $16-17/MMBtu in Asian markets.
The growth of LNG markets looks promising, especially as Asian and European demand continues to rise. Canada, East Africa, eastern Mediterranean countries and other new basins will enter the market. U.S. participation will be limited because of the conflicting interests between low U.S. costs of gas and higher profits from exporting. It is a hot market!