March 21, 2011 12:18 am

US gas market: Shale extraction technology leads to oversupplied market

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The breakthrough technology that created the US natural-gas boom has been the industry’s undoing.

The market is so swamped with gas that prices are at or below break-even for many producers. And yet the US government is so keen on renewables that it has yet to recognise that supporting a shift to gas from coal and oil would rapidly reduce carbon emissions.

“It’s a no-win situation for the industry,’’ said Fidel Gheit, managing director of oil and gas research at Oppenheimer and Co. “We’re sitting on a huge amount of gas.’’

The Japanese earthquake and nuclear disaster have caused a jump in natural gas prices. Japan was already the world’s largest buyer of LNG and has been bidding on additional cargoes in recent days.

We do not know what this will mean for demand in the long term but in the meantime some producers are moving to export the fuel in liquefied form.

Macquarie, the Australian bank, and Freeport LNG (liquefied natural gas) propose to retrofit an import terminal to condense and ship the fuel abroad.

The plan, announced in November, follows one outlined by Cheniere Energy for a combined import and export terminal at Sabine Pass, Louisiana.

Nick O’Kane, Macquarie’s global head of Energy Markets, said the response from countries it already has permission to export to – those 16 countries with a free-trade agreement with the US – has been “overwhelmingly positive’’.

“The US offers diversity for LNG buyers,’’ Mr O’Kane says. “And our pricing is attractive.’’ He will not detail what it is, only noting it is based on Henry Hub-based pricing, which has been about $4 per million British thermal units in recent months, since falling from a record of $13.69 per mBtu in 2008.

“We have enough customers who are interested,’’ says Charif Souki, chief executive of Cheniere. The company is working on the final design and long-term export agreements for the project. “With oil so high, there is an enormous market for gas on a global basis. We don’t have to ‘sell’ the reasons for the project to anybody.”

Nonetheless, the plans of both companies are being met by much scepticism in the industry, given the billions in investment required to enable gas to be liquefied for export, and competition from other potentially huge LNG export markets.

“I don’t see a strong push to import US LNG,’’ says Paolo Dutto, associate director with Arthur D Little Energy Practice. He notes that Australia and the Middle East were among those with huge gas resources that were preparing to export LNG. “It will be very hard for the US to compete with other regions.’’

Particularly, he says, since those countries are closer to Asia, the primary import market and, therefore, cheaper for importing.

“The long-term economics don’t support it,’’ says Andy Steinhubl, Houston partner at Bain & Co.

He believes the US will start using more of its gas with a recovery in the economy, which will promote power use, and the fact that it is cheaper to build gas-fired generating capacity than coal-fired.

That does not mean gas will displace current coal-fired capacity. Even at these low rates, Mr Steinhubl says, gas prices are not low enough to take out existing coal-fired capacity.

It would take much lower gas prices to do that. Nonetheless, he says, a carbon tax would put pressure on the installed coal base. It would take a charge of $35-$50 a metric ton to make it uneconomic to run existing coal.

But Mr Souki insists that in the past 30 years the US has not increased its domestic gas consumption and even if it moves to do so, there will be more than enough gas to fuel the domestic market as well as to be exported. He notes that 33 US states are gas producers and that number might well grow.

Nonetheless, the technology for extracting shale gas that has enabled the US to expand forecasts of supply to more than 100 years’ worth at current usage rates will spread abroad.

Foreign energy companies have been buying into the US sector to learn the expertise and technology to take back home.

And while it is unclear just how much shale gas will be developed across the globe, one indication came in a report from IHS Cambridge Energy Research Associates, which said: “The size of European unconventional commercial gas reserves rival that of North America.’’

It estimates that Europe’s total unconventional gas in place could be 173 thousand billion cubic metres.

“The technological revolution in unconventional gas has been the single most important energy innovation so far this century,” says Daniel Yergin, IHS CERA Chairman and author of the Pulitzer-Prize winning book The Prize.

“Its tremendous potential has already transformed North America’s energy landscape and may now transform the global gas industry.” If that happens, there will be even more competition for US LNG.

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