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LNG industry faces short-term glut but long-term opportunity

Article by Chris Tomlinson published May 28, 2015 by The Houston Chronicle under the headline:

LNG industry faces short-term glut but long-term opportunity

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The Methane Nile Eagle liquefied natural gas (LNG) ship, part of of BG Group Plc’s core fleet of LNG vessels. Royal Dutch Shell Plc agreed to buy BG Group Plc for about 47 billion pounds ($70 billion) in cash and shares, the oil and gas industry’s biggest deal in at least a decade. 

What do you do when the supply of your commodity outstrips demand and depresses prices? You find new customers.

That’s exactly what natural gas producers and entrepreneurs are doing today, developing new technologies that could revolutionize global energy use.

The precursors to this revolution are low natural gas prices and global concerns about climate change.

On the supply side, prices for natural gas rose in October 2005 to average $13.42 per million British thermal units at the Henry Hub trading center. That high price encouraged drillers to experiment with hydraulic fracturing and horizontal drilling. They were wildly successful.

Proved reserves of natural gas in the U.S. skyrocketed from 192.5 trillion cubic feet in 2005 to 338.2 trillion cubic feet in 2014. Prices last month averaged $2.62.

That’s caused by the “island effect.” Today North America has only one commercial-scale facility to liquefy the gas so it can be loaded onto ships for delivery to overseas markets that pay much more.

While the fracturing revolution was underway, foreign nations that believe in a proper science education decided to fight climate change by moving away from burning coal for electricity. Burning natural gas is much cleaner, but the problem has been obtaining it. Europe has relied on Russian natural gas delivered by pipeline, while Asian countries rely on imported liquefied natural gas, which can be very expensive.

After paying for the gas, a company must run it through a cryogenic process to liquefy it, and that costs about $3 for every million BTUs, according to the University of Texas’ Bureau of Economic Geology’s Center for Energy Economics. Shipping from the U.S. to Europe costs $2, to Asia $3.50. Turning it back into gas is another 80 cents.

If U.S. natural gas prices average $3, LNG could be delivered for $8.80 in Europe and $10.30 in Asia. That’s cheap compared with the $14.31 spot price for LNG in Japan last year. Gas in Europe last summer fetched about $13 for a million BTUs.

That price differential has spurred exploration. Global reserves of natural gas have risen from 6,000 trillion cubic feet in 2005 to 6,972 trillion last year with major new fields found offshore of East Africa and Latin America, according to the International Energy Agency.

Chevron Corp. and Houston-based Cheniere Energy are among a dozen companies building capacity to liquefy natural gas. Chevron is spending $83 billion to construct liquefaction facilities to export natural gas from its Australian fields, while Cheniere will bring the first commercial-scale U.S. liquefaction plant outside of Alaska online in Sabine Pass later this year, a $14 billion project.

These are only three of more than a dozen proposed liquefaction facilities around the globe. If that sounds like the beginning of an LNG glut, you’d be right.

“There’s 130 million tons of LNG capacity being built around the world, and the world only used 240 million tons last year,” said Nigel Darlow, CEO of Atlantic LNG, operator of the world’s seventh-largest liquefaction plant, in Trinidad and Tobago. “That’s a lot of supply to find a home.”

A link with oil

When it comes to LNG prices, most long-term contracts are indexed to the price of oil, which creates another problem. LNG prices have dropped dramatically from last year, and some buyers are selling onto the spot market because of reduced demand in Asia.

That’s sent prices spiraling down from last summer. The spot price for LNG delivered to Japan, the world’s largest customer, traded between $6.85 and $7.12 last month. In Europe, the price was about $6.70 for June delivery.

The energy markets are squeezing the LNG business at the moment that profits are hard to come by. But remember that thing about finding new customers?

The major barrier to importing LNG has been the cost of facilities to turn LNG back into gas. Cheniere spent $13 billion on its regasification plant before the U.S. natural gas boom, but CEO Charif Souki told executives gathered for IHS Energy CERAWeek in Houston last month that new technology allows for small regasification plants that only cost $1 billion.

Plants that float

Another solution is to put regasification plants on ships, something first done in the Gulf of Mexico in 2005. According to the U.S. Energy Information Agency, 10 countries currently receive gas through floating plants, and four more will begin as soon as the ships are available and more are under construction.

Lower prices for LNG and floating infrastructure are particularly important for nations that are true islands. Many small islands burn expensive bunker oil or diesel for electricity and can bring down costs dramatically by switching to gas but don’t have the infrastructure.

Cheaper regasification can also help increase use in China and India, both of which are energy-hungry and focused on using cleaner fuels, Darlow told the Mayer Brown law firm’s 10th Annual Global Energy Conference in Houston. Only 2 percent of electric power generation in China comes from natural gas, and “that’s very, very low,” he added.

European effort

Big European oil and gas companies recognize that the glut of natural gas is bad for shareholders and recognize that future profits are tied to encouraging demand.

The CEOs of French oil giant Total and Norway-based Statoil hinted at CERAWeek about forming a common policy on climate change that would promote natural gas as an alternative to coal. Bloomberg News, citing anonymous sources, reported that an agreement is near, though American oil companies are refusing to participate.

That’s a bad business decision, because here is an opportunity to join the fight against climate change and increase demand for an overproduced commodity. With plentiful reserves and innovations driving down costs, LNG could change the global fuel mix and help the planet at the same time.

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