Natural Gas Exports Set to Go Gangbusters

Guest Post by Peter Kelly-Detwiler
We posted last month on the dynamics threatening to push natural gas prices up in the near-term future, including the rapidly rising number of requests for licenses to export liquefied natural gas (LNG). In the past few weeks, that particular dynamic has accelerated into hyper-drive.
Total natural gas consumption appears to be on course to reach 26 trillion cubic feet (Tcf) this year, up from 24.3 Tcf in 2011, according to the Energy Information Administration.
Since mid-August, US companies have applied for permits with the U.S. Department of Energy to export 4.2 Tcf of LNG – more than 1/6 of current total domestic consumption. Total requests year to date equal 9.6 Tcf (though almost 1 Tcf is for re-export of Canadian gas). Add to that the 5.3 Tcf of export licenses filed in 2011, and you’re approaching a whopping 15 Tcf – or, 57% of today’s gas consumption.
Of course, not all of these planned facilities will get permitted or built. But some – and possibly many – will be built if the compelling economics stay that way. The global market demand for LNG exports is deep and here to stay.
“Our present LNG import capacity has exceeded 10 million tons per year and is set to rise to 53 million tons per year in the next five years,” said Radhakrishnan Guhan, Deputy General Manager, ONGC, India at this week’s LNG Producer-Consumer Conference in Tokyo, Japan.
In other words, India’s LNG import capability may multiply five-fold in five years. And it’s not likely to stop there. There is a big hole to fill and gas will help fill it. For example, Tokyo Electric Power is reportedly pursuing long-term gas contracts with North American suppliers for gas-fired generators in a post-Fukushima Japan.
Clearly, much of the LNG imported by these countries will be sourced from places other than North America. Today, 18 countries export LNG to 25 importing nations. The tiny nation of Qatar supplied almost a third of the world’s global LNG exports last year. America is the new kid on the block, supplying only 0.1% of the world’s exports last year. However, a powerful combination of robust pipelines, multiple vendors, and world class shale reserves make the US – and especially the Gulf Coast – a favored supplier. If permits can be secured, growth will occur relatively quickly.
The process of condensing natural gas into a liquid at -160 degrees Celsius reduces its volume by a factor 600, and makes it economic to ship. But the industry is capital-intensive and costs are considerable: A “typical” investment includes an outlay of over a billion dollars for liquefaction, ships at over two hundred million per vessel, and a receiving terminal at half a billion to a billion dollars. Yet even with those costs, the economic incentive is there. Currently, the North America pays just over $3 per MMBtu while the Japanese spot market price hovers around $13 per MMBtu.
Long-term contract shipments to Japan would likely be priced at less than $10 per MMBtu, according to Reuters. That’s a deep delta. Investments in supplying LNG to hungry Asian markets may yield payback periods of under five years for the first players into the game, according to recent reports by Wood MacKenzie, a global energy consulting firm based in Annapolis, Maryland.
The laws of economics dictate that in the long run, supply and demand reach an equilibrium. LNG facilitates that dynamic by linking land-locked supply to world markets. It truly makes gas markets more “liquid.” And this is bound to have a long-term impact on US natural gas prices.