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US shale resources to set to sail as LNG exports

Tentative sales agreements in place for Cheniere; Dominion a third LNG importer to plan exports

Plans to turn abundant US shale-gas resources into liquefied natural gas (LNG) exports have gathered steam, with energy firms eyeing new liquefaction plants and signing sales agreements. But the route from shale to sail may still be stormy.

This would be a remarkable U-turn for the US gas market – which only a few years ago was predicted to become the world's largest LNG importer until the success of shale-gas extraction – and exports could allow US LNG investors to claw back some of the billions spent on building unused import terminals.

Following Freeport LNG's plan to build an export plant in Texas in November last year, Dominion Resources said at the end of January it may also build an export facility at its Cove Point import terminal in Maryland, in the US northeast, possibly tapping the Marcellus shale for gas supplies.

"If you think about Cove Point, where it sits in the mid-Atlantic, a couple hundred miles from the Marcellus region, it has got all the facilities it needs other than the liquefaction plant itself," says chief executive Tom Farrell. First LNG exports could be as early as 2015, the company said.

Meanwhile, Cheniere Energy signed a memorandum of understanding (MOU) in late-January with Japan's Sumitomo for 1.5m tonnes a year (t/y) of supply, taking the total amount of export capacity sold under MOUs from its planned Sabine Pass plant to 7.7m t/y. That volume takes Cheniere to its export-volume target.

Sabine Pass is Cheniere's existing LNG-import terminal on the Louisiana coast, and the company plans to build up to four export trains – with capacity of 3.5m t/y each – with first shipment also possible in 2015. Its other MOUs are with Spain's Gas Natural Fenosa, Morgan Stanley, China's ENN Energy and EDF Trading.

From fantasy to reality?

"A year ago, the concept seemed pretty daft, but now, it has become a lot more attractive," Tony Regan, principle LNG consultant at Tri-Zen, said in reference to the plans to export seaborne gas from the US.

With US Henry Hub gas prices at around $4/m British thermal units (Btu) and European and Asian buyers paying around $8-10/m Btu for LNG, the economics seem to work, too. But a number of obstacles still remain, including US energy policy, export approvals and long-term pricing risk.

"The MOUs show there is real interest in exports," Biliana Pehlivanova, LNG analyst at investment bank Barclays Capital (BarCap), says. "But the US has a goal for energy independence, and in terms of gas, it's doing well. If you open the doors to exports, you are inviting greater unknowns for the US gas market. The government would want to be able to limit the amount of liquefaction capacity that can be built," she adds.

Although US gas-reserves estimates have been revised up and drilling costs have fallen, environmental concerns could yet curtail the rate of extraction from unconventional gas sources, says Nikos Tsafos, an analyst at PFC Energy. "Could the Environmental Protection Agency (EPA) conclude that hydraulic fracturing (fracing) damages the subsoil or the water supply? What kind of response would regulators implement and with what repercussions for production and pricing?" he writes in a research paper.

Fracing uses chemicals and minerals in the process of drilling for shale gas and environmentalists argue this may contaminate soil or pollute drinking water.

BarCap's Pehlivanova says other issues include sorting out trade routes, with the US government still needing to grant its approval for exports to the larger LNG buyers such as Japan and Spain. The only significant buyers under existing export rules are Mexico and Chile, although gaining approval to other markets many not be such an issue, with the ConocoPhilips and Marathon Oil-owned Kenai LNG terminal in Alaska exporting to Japan since 1969.

The US Department of Energy also extended the Kenai LNG export licence last year, allowing the 1.5m t/y terminal to export to Tokyo Gas and Tokyo Electric Power until March 2013.

And while a US west-coast export terminal might make more sense because of closer proximity to Asian buyers, securing permission for a liquefaction terminal could be tricky, Pehlivanova says. She adds that east-coast exports to the Pacific would carry the highest shipping costs, perhaps adding more than $2/m Btu to prices, making it economically less attractive.

Long-term gas pricing remains a risk, too, and without Asian buyers, US LNG exporters would be looking at Europe for customers. "There's a price risk and people are taking the risk that US Henry Hub will stay lower than UK NBP gas prices," says Tri-Zen's Regan, referring to the UK's benchmark gas price.

But in the short-term, BarCap forecasts US gas prices to remain below $5.00/m Btu for the next two years, making LNG exports attractive at least for a short period. "At $4.50/m Btu Henry Hub, a project can be very competitive," says PFC's Tsafos. "But increase Henry Hub to $6.50/m Btu and the project becomes the world's priciest – a place to go when out of options."

BarCap's Pehlivanova agrees. "A Henry Hub breakeven price of $6.50/m Btu sounds about right, but it depends on oil prices [because of oil-indexed gas contracts). It's a moving target," she says. Asian LNG and European gas contracts are linked to oil prices and during times of high oil prices, buyers turn to the spot market to find cheaper deals when possible.

And until the non-binding MOUs become firm orders, companies may find funding for multi-billion dollar liquefaction plants hard to come by. "So far the companies that have signed MOUs for capacity at Cheniere's Sabine Pass are mostly the non-traditional buyers (Gas Natural Fenosa being the exception). This suggests that most European utilities – the logical buyers for this gas – are continuing their hesitant approach to signing new contracts," says Tsafos.

The combined export capacity for the two export trains at Sabine Pass and Freeport would be around 16m t/y, making the US the seventh largest LNG exporter in the world, according to Petroleum Economist's LNG Data Centre (see Graph). Dominion said it was still carrying out preliminary studies and did not give an estimated export capacity.

If the US does become a significant LNG exporter, it would complete a total reversal for the country, which was forecast by the government's Energy Information Administration in 2005 to become the world's largest LNG importer by 2025. But shale gas extraction has helped turn the shortfall to a glut. 

 

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