Shale deposits in the USA. Source: EIA
The world gas market is currently dominated by gas exporting behemoths like Qatar, Russia, Algeria, and Iran. Natural gas is the cleanest fossil fuel–compared to coal and oil–and therefore encourages an increase in power plants that run on natural gas. Many coal-fired power plants in the U.S. are being retrofitted right now because of the abundance of domestic shale gas reserves and currently decade-low levels below $2.30 per million British thermal units. Moreover, natural gas can be piped to importing countries or converted to liquid form for ease of storage or maritime transport–in the latter case as LNG (liquefied natural gas).
According to Teekay’s Marine Market Analyst Christian Waldegrave, a growing global market for gas is in the cards. Projections for total demand for natural gas show an increase from 3149 billion cubic meters (bcm) in 2008 to 4535 bcm in 2035. That would translate to a 44 percent increase over the period. China and Japan are expected to dominate the demand side. Given the geographical mismatch between regions of production (Middle East, North Africa and the U.S.) and consumption (mainly driven by Asia), the volume of LNG trade via maritime transportation is projected to increase from 210 bcm in 2008 to 500 bcm in 2035 whereby the share of LNG in total natural gas trade vis-a-vis pipelines is projected to grow from 31 percent in 2008 to 42 percent in 2035.
Who are the main gas market participants? According to Teekay, Japan, South Korea, and India are the biggest Asian importers with China rising steadily and fast. In 2009 those countries–except for China–imported about 55 percent of total global LNG trade. On the other side, Qatar, Malaysia, and Indonesia were the biggest producers accounting for 44 percent of all LNG exports in 2009. Other major producers include Nigeria, Algeria, and Australia. Australia especially will play a significant role in the LNG trade to the crucial Asia-Pacific region by 2018. As the Financial Times reported recently, 70 percent of the global LNG production capacity under construction is located in Australia. Analysts estimate that LNG exports from Australia will increase from 20 million to 80 million tonnes a year by 2018 as eight giant projects come on stream. However, “Australia is the world’s high cost LNG producer” as Adrian Wood of Macquarie Securities points out.
This is where the U.S. and the willingness to exploit its extraordinary opportunity with its immense shale gas deposits come in. Large scale exports from the U.S. and in this respect Canada from its planned Kitimat LNG project–with several LNG terminals proposed for the northwestern British Columbia port–could not only be an existential threat to those Australian projects but also to the traditionally commanding positions of natural gas export giants like Russia and Qatar. Both already feel the heat because their customers–above all in Asia–see the leverage and clout shifting to the consumer side and thus have no interest in entering into expensive long-term contracts (sometimes 20-year contracts at fixed delivery prices). This fact will cause further major headaches on the producers’ side. Typically, given that multi-billion dollar investments are required in advance to get LNG projects off the ground, only those long-term contracts with consumer nations make the projects viable to begin with.
Also note that there is no uniform global price for natural gas. In general, in Asia demand for the fossil fuel is still robust and prices very high–several times higher than in the North American market characterized by a glut of domestic natural gas. Much higher prices in Asia are based on existing long-term contracts because of an absence of a regional benchmark like the cheaper Henry Hub-linked gas price in the U.S. and their link to crude oil instead of gas.
So yes, it makes a lot of sense to exploit this arbitrage in pricing. It opens up the possibility of shipping cheaper natural gas from North America to the Asia-Pacific region. In the U.S. Cheniere Energy has already received permits to build and operate its natural gas export Sabine Pass LNG terminal in Louisiana. Cheniere also signed an agreement with the Korean Gas Corporation to sell LNG beginning as early as 2017, as Forbes reported. More applications for LNG export permits by investors are pending before the Energy Department in Washington, D.C. . Not surprising, instead of winning the dash for market share and export markets as long as the natural gas prices are at historic lows in the U.S. we try to over-regulate and limit of how much to export in order to keep domestic natural gas prices artificially low. We, as a society need to decide whether we want cheaper short term energy – supply and demand will over the long term lead to higher prices whether we regulate or not – or a significant shift to cleaner energy in the long term. We should not dwell on the fact that we are sitting on the world’s largest shale gas deposits and get excited without doing what is necessary now; namely, take action to invest into infrastructure (export terminals on the East and also West coast with linked pipelines) and take the market share we deserve. It seems like we want to be late to the party because we are the ONE. Really? Newsflash – Nobody is waiting for us to join the LNG party at all. Qatar, Russia, Iran, Australia, Canada and maybe even Mozambique will be delighted if we continue to miss a slam dunk and do not show up because the U.S. potential is a major threat to their interests in the global gas market. In this respect, having a leader with foresight is an underestimated luxury.
In sum, currently the countries mentioned above do not really need to fear the U.S. natural gas potential yet because a country needs to have the ability to get its natural resources to the relevant markets. The U.S. lacks this LNG market access – for now. Hopefully that will change soon. Come on America, let’s spoil the LNG party!
