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Shale gas eroding US LNG demand

Shale-gas development has transformed the North American gas market, slashing US liquefied natural gas (LNG) imports again last year

But while other countries hope to replicate this success with their own shale reserves, the global affect on LNG demand is unlikely to be quite so dramatic.

For decades, LNG tankers have delivered natural gas from regions with excess supply to those without, particularly resource-poor countries in east Asia, such as Japan and South Korea. That capability has been a boon for countries such as Australia and Qatar, with huge gas resources that had remained undeveloped for lack of a market. In the last decade, more than 100 million tonnes of LNG export capacity has been built worldwide.

The rush was also on to build import terminals. At one point, more than 70 proposed projects were on the books. About 20 of these facilities were planned for the US alone, which faced a gas-supply deficit that led the government’s Energy Information Administration (EIA) to predict LNG imports would meet 25% of demand by 2025.

The US now has 11 import terminals, with a combined capacity of 105 million tonnes a year (t/y), and another 32 million t/y of capacity under construction that is due to start up this year, according to Petroleum Economist’s LNG Data Centre.

But the rapid development of the US’ shale-gas reserves has seen demand for LNG imports collapse. Shale-gas production soared from less than 1 billion cf/d in 2006 to more than 20 billion cf/d last year, from reserves that could total more than 1,900 trillion cubic feet (cf) according to the EIA. Output is projected to reach 30bn cf/d by 2015 – about half of North American production.

And the shales aren’t North America’s only source of unconventional gas. The continent, especially the US, is also rich in tight gas and coal-bed methane. “A real plus is the diversity of these supplies spread throughout the US,” Emma Cochrane, vice-president, Asia, Pacific, Africa and Power, ExxonMobil Gas and Power Marketing told the OTC conference in Houston.

A gas island

As shale-gas production has grown, the US’ demand for LNG has dropped, isolating North America as a “gas island”, said Rafael McDonald, associate director, IHS Cera Research. Prices have also disconnected, with the US Henry Hub price below the $5/million British thermal units (Btu) mark since early last year, compared with European prices averaging $9.5/million Btu in April and LNG trading in Asia-Pacific at around $12/million Btu.

“LNG was supposed to bring the gas world together as one market, but North America is becoming regionalised,” said McDonald.

In 2010, the US imported 8 million tonnes of LNG according to Cedigaz estimates, utilising just 7.5% of the country’s import capacity. Imports peaked at 15.7 million tonnes in 2007. Faced with a dwindling demand for imports, some owners of regasification terminals are proposing their conversion into export facilities (PE 3/11 p16).

Taking the export option

Last year, Cheniere Energy announced plans to add liquefaction capabilities at its Sabine Pass LNG terminal in Texas, which would transform it into the world’s first bi-directional facility capable of liquefying and exporting gas, as well as importing and regasifying LNG. Cheniere is awaiting a permit from the Department of Energy. In addition, Freeport LNG and Dominion Resources are planning export facilities at their US Gulf-coast import terminals.

Cheniere expects no federal block on the permit request. As a member of the World Trade Organisation (WTO), marketing president Davis Thames claimed, the US is mandated to export natural gas to other WTO members under free-trade agreements. “Unless you have some critical consumption problem, you cannot constrain exports to other markets.”

As the US ramps up as an LNG exporter, it will find a ready market. According to ExxonMobil, global gas demand will grow from 310 billion cf/d in 2005 to about 475 billion cf/d in 2030. Although conventional domestic production will meet much of global consumption, many regions will need additional supplies and LNG – which accounted for nearly 30% world gas trade last year, according to Cedigaz, up from 26% in 2009 – will fill much of the gap.

Shale goes global

But how much will depend to some extent on unconventional-gas development outside North America.

In Europe, reliance on pipeline and LNG imports continues to grow as local conventional reserves deplete. The continent faced a gas glut in the late 2000s. But a variety of factors – among them, economies recovering from the recession, two cold winters, political unrest in Libya that has cut supply to Italy and potential diversion of some LNG shipments to Japan – has reduced the supply/demand gap and additional gas supplies will be needed.

Europe has significant shale-gas reserves (potentially 639 trillion cf, says the EIA), which could be produced at a reasonable cost – although more expensively than in North America. And the shale-gas revolution has already reached some regions: Ukraine (with an estimated 42 trillion cf of resources) is fast-tracking production plans; and several companies are already drilling in Poland (187 trillion cf).

But France (180 trillion cf) has voted to ban hydraulic fracturing (fracing) – the drilling technique that unlocks natural gas from shale formations. And fracing is also the subject of debate in the UK parliament (20 trillion cf – PE 3/11 p29). In both countries, environmental concerns have put development plans on hold. An outright ban would necessitate LNG imports for the foreseeable future: France imported 10 million tonnes last year, up by 7% over 2009; while, the UK drew in nearly 13.5 million tonnes, up by 82%, says Cedigaz.

The China factor

The Asia-Pacific region, however, will see growth in domestic conventional and unconventional gas production, as well as imports.

China has significant shale-gas reserves – perhaps the world’s largest (1,275 trillion cf) – and is moving rapidly to recover them. While this may slow the country’s LNG demand, “it won’t happen anytime soon”, said Richard Davis, manager, oil, gas and chemicals, Bechtel.

According to IHS Cera, China is set to have up to 40 million t/y – over 5 billion cf/d – of LNG supply under contract by 2018, making it the world’s second-largest importer after Japan, which imported 67 million tonnes last year. Chinese LNG imports last year reached nearly 9 million tonnes, up by 63% over 2009, having imported its first cargo only in 2006.

Meanwhile, the triple whammy that devastated Japan – earthquake, tsunami and nuclear meltdown – is accelerating the country’s LNG demand. Although the increased role of gas-fired electricity in compensating for the country’s loss nuclear power capacity is still uncertain, Japan has more than 50 million t/y of available regasification capacity, said IHS Cera’s McDonald.

And there should be plenty supply available to meet demand, with many countries and companies pledging to meet Japan’s short- and long-term needs.

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