Articles from 2013
Shale gas and Prices part two.
- Written by Nick Grealy
- Published: 13 September 2013
In the first part of an attempt to clear up confusion about UK shale gas and world prices I concentrated on LNG and will do so this time from the North American angle. Caution:if you thought part one was complicated, don’t even try this one.
Nothing shows more the gulf between the present and past than two recent news items, separated by only four and a half years. The WSJ looking backward in 2009:
The conventional wisdom said that the U.S. would soon become a big importer of natural gas. The conventional wisdom blew it
In the summer of 2003, former Federal Reserve Chairman Alan Greenspan appeared before a congressional committee to share his thoughts about the U.S. natural-gas market. It might have been better for the industry, and some investors, had he kept those views to himself.
The disrespectful tone towards Greenspan, treated at the time as demi-god by the financial masters of the universe, underlines how rapidly the world changed between 2003 and six years later. Unfortunately, much of UK energy policy, and the wishful thinking of green opponents opposition to shale on price grounds equally ignores how completely the narrative has changed.
Today, the peak natural gas and peak oil narrative is so dead that the Peak Oil web site The Oil Drum effectively shut over the summer. We would have truly been in deep do-do over energy if the world did now have to compete for LNG with the United States. But that has become one of the most spectacular bad calls in the crowded field of recent financial disaster history. Greenspan’s address not only underpinned the financing of several US import terminals, it also lay behind the new export capacity now only starting to come on line in Australia and Angola, or additions from Nigeria, Algeria, Yemen etc. Those terminals were meant not only to address Asian demand, but primarily aimed at North American markets.
By 2009, the narrative was overturned. US LNG demand evaporated, and this was the first instance of how US shale caused spot prices for LNG to be far lower than predicted. The essential chasm today is, as it was for pipeline gas in Europe,lies between natural gas linked to oil prices or gas linked to spot markets. The oil link has been discussed here before, but the logic of it was that incredibly expensive mega projects needed long term links to oil to secure financing. Regarding today and what the true long term price of oil should be (smart people like Amy Myers Jaffe say it should be $50) is just too complex to throw in the mix, but it certainly militates against any notion that natural gas will go up.
But the truly disruptive news is that US import terminals started to be re-tooled to export and entire new ones constructed as well - and not only in the US but also in Canada.
I’ve consistently pointed out that the revolution in gas production in the US was not only real, but permanent enough to change the issue to creating demand,not supply.That will be our problem in Europe one of these years, but let me go back through the No Hot Air search engine time machine to allow me an ITYS moment from May 2010:
...if the Gulf Coast can export, then virtual and subsequent physical exports straight from the Marcellus to the world via Cove Point LNG in Baltimore will prove that shale gas will change the world.
US gas exports to the UK. If that won't nail down the lid on security of supply fears, what will?
At the time, there was a lot of pushback that thought it unlikely even Gulf of Mexico exports would be approved. Expert opinion was almost unanimous on the subject. Any notion Cove Point would even be considered was judged as on a scale of highly unlikely to simply insane. Unattributable sources within Statoil immediately told me it was part of their plan all along when they made the first European investment in US shale in 2008. But that was definitely not for public consumption and the official Statoil line, put out by the army of Norwegian gas experts to financial markets, was how gas would still be increasing in cost thanks to growing world demand. BTW, Norway has a vested interest in that for other reasons as this from the story “Richer than Thor” from the Economist shows. The predicament over the new paradigm is mirrored in all the big oil companies. Shale is a small part of the big picture and actually disrupts the larger picture economics of LNG and off shore. A fine balance has to be maintained often within the same corporation, between enthusiasm levels for and against natural gas, which explains many of the statements Greens jump on when an IOC executive says that gas prices will continue to rise and/or how shale gas won’t amount to much outside the US.
But this years version is not only is the US approving LNG exports, they are accelerating.
Based on regulatory approvals so far and sales contracts already signed, the United States will export much more liquefied natural gas (LNG) by the end of the decade than most analysts thought possible even a year ago.
Including the deal that would never happen, happening:
With the approval of an application from Dominion Cove Point on Wednesday, the department has now approved four projects, authorising them to export up to 6.37 bcf/d.
Even more disruptive for world LNG markets is how the US are extending export proposals. As recently as June, a Norwegian LNG expert was insisting to me, as a City energy analyst nodded his head, that US LNG decisions would be both delayed and negative.
Next up on the approval list is more retooling of import to exports, after which a project that I’m going to go out on an educated limb for, is up for approval. The Jordan Cove project in Oregon is notable for being the first greenfield export site, the first on the West Coast and one that may export Canadian shale gas as much as the US flavour. The economics are compelling and those who think Oregon too green to do it should look south to California's coming uptake of fracking approved just this week with the full support of Governor Jerry Brown.
The problem with both Canadian and US West Coast projects remains that they need to be built from scratch, far more complex than a mere billion dollar tack on to existing import terminals.
But the US doesn’t want to give you just that. Not many know Alaska has been exporting small volumes of LNG directly to Tokyo Gas since 1969, but a new deal shows how Alaskans have a deserved reputation of going their own way:
The State has committed to a formal working relationship with a major Japanese financial institution that wants to develop natural gas projects.
Natural Resources Commissioner Dan Sullivan signed the memorandum of understanding with the Japan Bank for International Cooperation on Wednesday during a trip to Tokyo.
The deal is basically an act of financial diplomacy. It establishes that both parties have a mutual interest in getting Alaska natural gas to Japanese markets, and that there’s a potential for the two to work together on financing a gas pipeline or an export facility.
In a phone call from Japan, Sullivan said the agreement is about more than just this one bank. It’s also a good signal to other investors about the viability of Alaska projects.
“It is a big deal,” Sullivan said. “It boosts the credibility of Alaska’s gas commercialization efforts.”
You betcha, as a recent Alaskan politician would put it.
The net result of this confusing geography lesson is that US LNG exports will push down prices world-wide. Cove Point sounds far more logical as a provider of UK and European LNG imports, which means we won’t only get benefit of US shale, we’ll get the actual molecules themselves.
The recent history of shale, LNG and gas pricing does show one clear cut conclusion. Whatever the conventional wisdom is, or was, it’s been blindsided by reality. Simple explanations no longer apply. But simple explanations, like simple leave fossil fuel in the ground slogans, get the space. It's not that any journalist that has gotten this far is stupid: they're not. The problem, as it has been througout the UK shale debate, is that they are also thinking how can I package this to my readers in more than two sentences? It can't be done. What should be done, is to actually trust the intelligence of the readers. They may surprise you.
As complicated as these two pieces have been, it is simplistic to say that LNG alone will be a driver in Europe. Next time, a closer look on what physical volumes of European shale could do for prices and the latest opinion from the very same regulators and experts often cited by Greens as reason not to access our own shale resources.