The LNG export play

Nice FT story on what Shell is saying about natural gas in the US.  Current Henry Hub price has been hanging around $2.25-2.55, which is about 3-4 times cheaper than Europe MMBTU (millions British thermal units) and bizarrely cheaper than most Asian countries are being quoted right now (more like $14-15 and moving north for the summer to almost $20 - by some predictions).

Think about that for just a second.  Natural gas in the US at something like 1/8 the price in Asia.  How long do you think that lasts?  Why should it?

To me, that's a huge LNG (liquid natural gas) market waiting to be captured by US producers.  Selling LNG ain't like moving 100,000 metric tons of diesel or jet fuel or 2 million barrels of crude in one large tanker.  Those transactions are the equivalent of one-night stands and leave your money on the dresser.  Selling LNG is more like getting married: the buyer has to have a relationship with a regasification terminal nearby.  There must be pipes that connect the end-user to that LNG terminal (only so many in the world, but plenty being built).  If no regasification terminal, then buyer needs to rent himself a regas ship ($50m a year), park it somewhere, and then connect that by pipes to the end-user.  All very complex. 

Of course, the seller must have liquefaction facilities at ports, with pipelines connecting fields.  

America is piped up like crazy and adding more pipe all the time.  We're just getting our first for-export liquefaction facility set up in Louisiana by Cheniere, which is leading the effort here to gear up for export.

All very exciting stuff, as we could be exporting - within a few years - upwards of 1/4 of our production.  Then you factor in all the coal displaced in electricity generation, and we can be exporting that high-quality stuff to Asia along with the LNG -  a win-win on trade balance and energy security.

Back to the FT piece:  the currently depressed US prices are just too low, reflecting that we're running out of storage after a mild winter and a continued production boom.  Shell's prediction?  US NG prices will double by 2015.  Expect the petrochem industries to hawk that fear like crazy, but in truth, it's a reasonable rise to just $4-6 MMBTU.

[Shell, BTW, has done a lot of exploratory drilling on NG in China and says it thinks the reserves can be developed economically.]

Shell is also "examining plans to liquefy US gas for export - which would allow it to attract higher prices, particularly in Asia - transform it into clean-burning transport fuel through gas-to-liquids technology, and use it as a feedstock for petrochemicals."  That's a quick rundown of the range of economic opportunities - in addition to displacing coal in electricity.

All good stuff and an integral part of America's coming industrial renaissance.

Comments

[Tom Wade]

Excellent post. Love the "one night stand/marriage" analogy. As this develops, why not explore building our own LGN tankers due to the complexity. Here is an example of China using the complex ability to build LGN tankers to build aircraft carriers. We already have the technology for aircraft carrriers, why not use that skill to build an even more efficient LGN carriers? http://www.chinasignpost.com/2010/12/lng-carriers-to-aircraft-carriers-assessing-the-potential-for-crossover-between-civilian-and-military-shipbuilding-in-china/

[Mark in Texas]

Here's another thing that we could do with that $2.25 natural gas. We could use it to run our cars. It produces fewer emissions than gasoline, cars run fine on it and it works out at current prices to something like $1.00 a gallon equivalent. You can get a compressor at your home that will take gas from the same pipe that runs your furnace and hot water heater and compresses it into your car. If you can't find a place to refill the CNG tank, you can flip a knob and run off gasoline in your gas tank.

Why, then don't more Americans convert their cars to CNG to take advantage of this cheap and low polluting energy source? Well, in the rest of the world it costs about $800 to $1200 to buy a conversion kit and have it installed. In the United States the EPA requires certification testing that raises the cost of conversion to about $25,000. If you get caught with an uncertified CNG conversion the EPA can fine you $5000 per day for tampering with your car's smog controls even though the car actually runs cleaner on CNG.

As a thought experiment imagine the effect it would have on the US economy if the President issued an executive order for the EPA to back off on CNG conversions. Thousands of auto repair shops all over the US would be busy and hiring additional employees installing the conversion kits in millions of cars and trucks. Those millions of vehicles, in addition to spewing out tons fewer pollutants, would be consuming millions of gallons less gasoline which means that we would be be importing millions of gallons less oil and exporting billions fewer dollars. The additional consumption of natural gas would cause the price to rise and more Americans to be employed in the gas fields. The lower price that people would be paying to commute to work means that they would have money for other things, like paying their mortgages instead of defaulting, for example.

The decreased demand for oil from the United States would mean less competition in world oil markets for Chinese oil buyers and a lower price to them which might be enough to keep the Chinese economy from falling over.

I really don't see any downside from removing the EPA's effective ban on CNG conversion except to those who profit from high oil prices.

[Louis Heberlein]

Our national media 'seems' unaware of US and global major transformations which include energy, tailored high value / low volume manufacturing, small businesses with complex high value services etc. I see some coverage on PBS and investor channels, but not much on the wider social and educational change implications. I'm not sure why there is such low media awareness ... unless they think probable losers from transformations will react strongly.