By David Alton Clark
US producers of natural gas, Liquefied Natural Gas (LNG), and oil like Chesapeake Energy (CHK) continue to drill the Eagle Ford Shale and other unconventional plays when natural gas prices are at depressed levels.
The US rig count has increased from 750 rigs at the beginning of 2010 to currently around 1,700 rigs. Althoug the domestic gas rig count (around 900) plunged to a one-year low the week ending March 4, gas rigs still outnumbered oil rigs, and analysts say the current level of activity is still seen yielding strong gas production.
The price of natural gas in the US is less than $4.00 per million British thermal units (mBtu) and many analysts are predicting it will stay at these levels for the foreseeable future.
The US is awash with natural gas from the shale gas plays of Texas, Arkansas, and Pennsylvania to name a few. The increase in production of natural gas is a major change in circumstances and has created a glut of natural gas on the market.
Not so long ago energy companies believed that the US would be importing large quantities of liquefied natural gas. Re-gasification plants were built to accommodate the LNG shipments. The United States currently imports and exports natural gas from Canada through pipelines. Liquefied natural gas is imported from Algeria, Trinidad & Tobago, Qatar, Malaysia, Australia, and the United Arab Emirates through LNG import terminals.
We may see some relief in the price of natural gas but its not likely under current conditions. Three-year leases originating in 2008 will be satisfied, which will allow producers to reduce the drilling commitments in certain shale plays. Limitations in frac equipment, liquids processing, and pipeline capacity may keep production levels in various plays at bay, but the sheer size of the recent finds and the increase in production levels should allow for the over supply situation to persist.
So what is the solution? Simple, increase exports of natural gas. If you say that to some people in the natural gas business you might get laughed at (I know) but lets take a closer look anyway.
Is increasing exports of LNG feasible?
The Department of Energy is responsible for regulating the import/export of natural gas. Section 3 of the Natural Gas Act of 1938 requires anyone who wants to import or export natural gas, including liquefied natural gas from or to a foreign country must first obtain an authorization from the Department of Energy. The Office of Natural Gas Regulatory Activities is responsible for these authorizations. The import/export authorizations are necessary for anyone who wants to market, trade, or use foreign natural gas.
The price of natural gas in the US is less than $4.00 per mBtu and the price of natural gas in Asia is around $9-$10 per mBtu. This is an opportunity for major profits. The problem is the natural gas market is for the most part local. It is not as easy to ship natural gas as it is to ship oil. Natural gas must be supercooled so it liquefies.
Cheniere Partners (CQP) received permission from the US Department of Energy to export LNG produced in North America from its Sabine Pass terminal. The company had already received permission to re-export imported LNG. Cheniere Partners announced a memorandum of understanding was signed with a Chinese company, ENN Energy Trading Co., to provide the company with 1.5 million metric tons annually of LNG produced at Sabine Pass.
Additionally, Cheniere Partners signed a memorandum of agreement with Morgan Stanley Capital Group Inc. The agreement would allow Morgan Stanley to import or export up to 1.7 million metric tons annually from Sabine Pass. Currently, there is one other North American LNG export facility.
The US has 10 LNG import terminals where the owners are petitioning the US government for export licenses to join the race to export LNG. We could see the ramp-up of export facilities in the near future. This bodes well for the natural gas industry and companies like Chesapeake Energy, Corp. This may be one of the reasons why Carl Icahn recently has taken a sizable stake in the company.
The fact that the US may be on its way to becoming a significant exporter of natural gas rather than a significant importer is amazing and seems inevitable. If shale gas development and extraction continues on its current pace this will become a lucrative new business. Then, the US could soon be competing to supply the world with natural gas. If the US exported just a small percentage of its natural gas, it would become one of the largest exporters of LNG in the world.
The US can compete with any country regarding natural gas costs and reserves. China and Great Britain have become net importers rather than net exporters of natural gas along with a number of other countries. The global demand for LNG is evident. The US supply is abundant and cost effective.
If US energy companies execute on current plans to increase export capabilities the price of natural gas should soar. This opportunity is too great and too obvious to be ignored. I’m betting energy companies won’t let this one slip through their grasp.
Related Reading – Natural Gas: Better Days Ahead (in Two Years)
About the Author: David Alton Clark is President and Managing Consultant at Valiant One with over 25 years of diversified experience in various areas including oil & gas and financial analysis.
The views and opinions expressed herein are the author’s own and do not necessarily reflect those of EconForecast (Economic Forecasts & Opinions).
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