The entire gas producing world can see a major opportunity in Asia right now. Prices for imported gas have been soaring as the energy crisis persists in various countries across the continent. The United States, despite its huge shale gas reserves, has been unable to act on this opportunity because it does not currently have the necessary LNG export facilities to supply the increasingly hungry Asian markets. This is all about to change, however, with BG Group and Cheniere Energy signing a landmark sales and purchase agreement to export US gas from Sabine Pass in Louisiana. As the US takes its first tangible steps to join the race to fuel Asia, Evaluate Energy provides its take on the impact this movement could have on the US domestic shale gas market, and an extensive look at the other main contenders competing to meet Asia’s energy shortfall.
Landmark LNG Export Agreement
BG Group has signed a landmark $8 billion deal with US-based Cheniere Energy to purchase 3.5 million tonnes of Liquefied Natural Gas (LNG) per year for 20 years from Cheniere's planned Sabine Pass Liquefaction terminal in Louisiana, in what could prove to be a major boost for the US shale gas industry. LNG exports from the terminal are expected to begin in 2015, and at 3.5mtpa, BG has only taken up around 39% of the 9mtpa planned export capacity. BG will be purchasing the LNG at a rate above the Henry Hub price, plus a premium, and BG's extensive presence in the LNG industry across the globe opens up a whole plethora of possible higher paying markets for US gas.
The deal represents a lifeline for Cheniere, who, with this agreement, now has the required financing to realise its Sabine Pass export project. The company has been going through a rough time, much like many others that have brought a destined to be idle LNG import facility onstream in the US in recent times. Cheniere was among the first to apply for permits to turn its import facility into a bi-directional terminal, with capabilities for export, and is now firmly on the road to executing its plans. ConocoPhillips (Freeport terminal) and Dominion Resources (Cove Point terminal) and BG itself in conjunction with Southern Union Company (Lake Charles) have also applied for licenses to turn their mostly idle LNG import terminals into more lucrative exporting ventures.
The rewards for the export of gas from the US for producers and the exporting companies are becoming clearer all the time. The US gas price has been in somewhat of a freefall in recent times, Henry Hub now languishing at $3.60 per mcf (19 Oct). However, in the Far East, Japan in particular has been paying relatively high rates to import gas, ever since the earthquake that rocked the country’s power supply in March. One exceptional example came at the beginning of the month, with Kansai Electric reportedly paying around $18 per mcf for a shipment from Statoil's Snohvit terminal in Norway, more than half a world away. BG is looking set to benefit from the arbitrage opportunities here, once exports from the Sabine Pass terminal begin in 2015/16. This arbitrage is in fact the finish line that the various gas producing countries and companies are striving to reach first. The price gap between Asia and other gas markets will not be so great forever, as the gas market becomes more of a global machine, prices are likely to slowly converge. And with many terminals due onstream between 2015 and 2016, a timescale for this convergence may have been set.
Too Much Gas Trapped in One Place – US Shale Gas Industry Suffering
Until LNG exports become more widespread in the country, domestic producers will no doubt be suffering from the rigidity of the gas market compared to the oil market. Gas, as a resource, presents significant transportation issues compared to oil, as without LNG technology, it is restricted to pipelines, trapping the gas in particular markets. An over-supply, as has happened in the US with the huge shale gas boom over the last 10 years or so, can be fatal for prices, and activity will slow as it becomes less and less economic to produce gas at all.
As prices have fallen over the last few quarters, a look at the horizontal drilling activity in the more “gassy” plays like the Haynesville, Fayetteville and Marcellus demonstrates this. Activity in these plays has been leveling out, whilst the Bakken and especially the Eagle Ford, plays that are much more oil rich, have seen a perpetual rise.
A LNG industry will bring liquidity to the gas market, and may provide the spark required to revive this apparently faltering industry. It will take a long time to see tangible benefits for domestic producers and exporting companies across the board, but the seeds are being sewn for this revival. The promise of LNG exports could also provide some relief for companies that have recently bet big on US Shale Gas plays in the M&A market, ExxonMobil's huge $41 billion acquisition of XTO that completed in 2010, and BHP Billiton's very recent acquisitions in the Fayetteville and Haynesville plays are just two examples that immediately spring to mind. With domestic gas prices falling at such a rate, the possibility to get the gas out of the US to more lucrative horizons will no doubt be welcomed by gas producing company shareholders and directors alike.
The Race Is On
These gas producing companies, and the very willing importers from the East, are likely to lead the scramble for liquefaction capacity as American terminals come closer to export start-up. In terms of Asian markets for the LNG, Japan is the most obvious, and its power companies are most in need of the fuel. Tokyo Electric Power Company (TEPCO), for example, has been among the most vocal in the news recently with claims that it will be looking to take up interests in terminals and buy into LNG export capacity around the world to feed its client’s energy needs. India and Pakistan have also been very active in trying to build import terminals, as both are looking at energy shortages in the near future. GAIL, one of India’s state-owned entities, has been regularly linked to shale gas acquisitions in North America in recent months, looking to secure gas supply for its country. Asia’s energy shortage is clearly a huge opportunity for those capable of taking it, but the US is by no means the only country in the race to fill the gap. Australia is all set to overtake Qatar as the world’s biggest LNG exporting country around the end of 2016 with current construction plans. Canada is also taking its first official steps on the road to exporting gas with 3 applications to build terminals at Kitimat, British Columbia. The most advanced of these applications is being led by Apache, in co-operation with Encana and EOG, who will no doubt be encouraged by the recent developments further south.
Selected LNG Export Terminals Due Onstream Before Year End 2016
Source: Evaluate Energy LNG Database
A mention must also be made of the gigantic gas discoveries offshore Mozambique, separate multi-TCF discoveries being made by a consortium led by Anadarko and Italy's Eni in recent months. Both operators have muted the possibilities of building an LNG export terminal to monetize the gas, with India a likely destination due to Mozambique's favorable location.
But although the US is joining the race relatively late in the day, it is by no means lagging significantly behind. BG is one of the biggest LNG companies in the world, with extensive contacts and favorable relationships in the Asian markets. US infrastructure is also at a much higher standard, the Sabine Pass Terminal is after all already attached to the pipeline network in its capacity as an operational, albeit idle, import facility. This will be more of a hurdle for Australia, and Queensland in particular, where the huge coal seam gas reserves in the region have seen concrete plans for no less than 5 terminals to be built in Gladstone. The area will need to include extensive pipeline construction projects before the terminals are fed enough to reach full capacity.
Only time will tell where Asia's gas will eventually come from, but by 2015/6, the entire gas producing world will evidently be taking a shot at supplying it.
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