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May 23rd, 2013

North America: Natural Gas Supplier to the World?

by Andrew Price, President & COO

Near term natural gas prices jumped Friday afternoon. The reason? The US Department of Energy (DOE) approved natural gas exports by Freeport LNG, an LNG import facility that has proposed a $10 billion reversal to be able to export domestically produced natural gas by ship to Europe and Asia. In Atlantic Canada, there are at least two companies looking at liquefying locally produced natural gas for export by ship. With world prices for natural gas between $10 and $15 per MMBtu, the US market, at $4 per MMBtu, looks very attractive. Should domestic consumers be concerned about US prices for natural gas rising to match world levels? If so, when?

 

The DOE order provides Freeport LNG the ability to export up to 511 billion cubic feet (BCF) per year, or an average of 1.4 BCF per day. Freeport joins Cheniere Energy’s Sabine Pass terminal in Louisiana as the only two facilities with full approval to export natural gas. Cheniere has authority to export up to 803 BCF per year or 2.2 BCF per day on average.

Importantly, the Freeport LNG export capacity still needs additional regulatory approvals and, if all goes well, is not expected to come online until 2017. Sabine Pass is not scheduled to export gas until 2016. Why should exports this far into the future impact near term pricing for natural gas? One possibility is that natural gas producers could shut-in near term production in hopes of getting higher prices once exports start.

Freeport LNG was opened in 2008 as an LNG import facility. The surge in domestic natural gas supply and subsequent collapse of domestic natural gas prices, due to hydraulic fracturing of shale deposits, has resulted in little to no demand for imports of LNG to the US. Struggling to stay viable, Freeport, along with almost all other LNG import terminals, started the lengthy and expensive process of turning themselves into export facilities. Freeport LNG was granted the ability to export to countries with US Free Trade Agreements in 2011. The Friday approval adds the ability to export to countries without Free Trade status. This approval was critical; the US has Free Trade agreements with countries like Morocco and Nicaragua, but not with many of the primary demand centers for LNG in Europe and Asia (e.g. China, Spain, England, Italy, Japan, Taiwan, India).

In Atlantic Canada, exporters are being attracted by the large shale gas deposits in the region. I have previously identified these shale deposits as a potential savior for New England, which is projected to face natural gas delivery constraints over the next several years. The New Brunswick Canada shale deposits are not fully explored, let alone developed, and the timing on these export facilities is highly uncertain. H-Energy, an Indian company has announced preliminary plans for a $3 billion LNG liquefaction and export terminal in Nova Scotia. H-Energy is also constructing a $2 billion natural gas fired power plant in India and so low cost natural gas from the US may be a natural hedge. H-Energy joins Pierida Energy of Calgary, which has also announced a $5 billion liquefaction and export facility in Nova Scotia. The H-Energy and Pierida Energy facilities would have 219 and 487 BCF of annual export capacity, respectively, as currently proposed. Both have target in-service dates of 2020.

As many as 18 other applications for LNG export facilities are currently in front of the US Department of Energy and Federal Energy Regulatory Commission. Combined these applications represent about 26 BCF per day of potential export capacity. To put this in perspective, this is a bit less than ½ of total current domestic natural gas production. How many natural gas export facilities are ultimately approved and constructed, and what impact these facilities will have on domestic natural gas prices, remains to be seen. Competition from export facilities being built in Australia, East Africa and the Mid East could limit US exports. US environmental groups are also joining with large domestic consumers to slow down domestic exports of natural gas.

 

It seems logical that, with physical deliveries from the US to overseas markets still several years away, near term price impacts should be muted. The market reaction to the Freeport LNG announcement, however, shows that the market is not discounting the possibility that some natural gas producers will decide to wait for better prices in the future, instead of selling into today’s relatively low priced domestic market.   

Photo: Canaport LNG Import Terminal www.canaportlng.com

Tags: Freeport LNG, H-Energy, Pierida Energy, Cheniere Energy, Liquefied Natural Gas, LNG, FERC, Department of Energy, New Brunswick Canada, Texas, natural gas exports

 

 

 

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