Can the U.S. Become the Saudi Arabia of Natural Gas?

LNG_Energy_Dominance

The Department of Energy gave a Texas-based energy company permission Tuesday to export liquefied natural gas (LNG) to countries with which the U.S. does not have free trade agreements.

Golden Pass Products will build an LNG export terminal capable of shipping 2.21 billion cubic feet per day (Bcf/d) of natural gas around the world. It’s the first LNG export terminal approved by the Trump administration, adding to the already 19.2 Bcf/d of exports approved by the Obama administration.

The export facility will create an estimated 45,000 direct and indirect jobs over the next five years, according to Golden Pass. The company estimates the construction operation of the facility will generate up to $3.6 billion in federal and state tax revenues.

The Trump administration said the terminal’s approval would help make the U.S. a “dominant” energy force in the world.

“This announcement is another example of President Trump’s leadership in making the United States an energy dominant force,” Energy Secretary Rick Perry said in a press statement. “This is not only good for our economy and American jobs but also assists other countries with their energy security.”

U.S. energy ascendancy will have political implications in Europe where about half the continent’s natural gas supply comes from state-owned Russian companies. Foreign policy experts see U.S. gas exports as a way to undermine Russia’s energy dominance in the region.

[…]

U.S. consumers would deal with minimal costs to export LNG and it would lead to huge economic benefits, according to a study published in December 2015 by the DOE. The study found exporting American LNG would provide huge environmental benefits as well. The report states exporting LNG will help “address a variety of environmental concerns in the power‐generation sector.”

Exporting natural gas is likely to be a growth industry, as global demand for natural gas is expected to be 50 percent higher by 2035 than it is now, according to the International Energy Agency. Demand for imports of LNG increased 27 percent in the United Kingdom last year alone.
Read more: http://dailycaller.com/2017/04/25/trump-approves-natural-gas-export-terminal-in-bid-for-energy-dominance/#ixzz4fXmmrQWe

 

Terminology

The shale revolution enabled U.S. natural gas production to surge out a 30-yr  doldrum:

 

chart (1)

Figure 1.  U.S. natural gas production (Bcf).  Source: EIA

 

The surge in production has been accompanied by a surge in exports:

chart (2)

Figure 2. U.S. Natural gas exports (mmcf).  Source: EIA

LNG exports are expected to be the driving force in the U.S. natural gas business over the next 30 years.

EIA: LNG exports expected to drive growth in U.S. natural gas trade

2/24/2017

WASHINGTON, DC — The United States is expected to become a net exporter of natural gas on an average annual basis by 2018, according to the recently released Annual Energy Outlook 2017 (AEO2017) Reference case. The transition to net exporter is driven by declining pipeline imports, growing pipeline exports, and increasing exports of liquefied natural gas (LNG). In most AEO2017 cases, the United States is also projected to become a net exporter of total energy in the 2020s in large part because of increasing natural gas exports.

[…]

The growth of natural gas exports, especially from new LNG terminals, sustains continued growth in U.S. natural gas production. In the Reference case, natural gas production is projected to grow through 2020 at about the same rate (3.6% annual average) as it has since 2005, when production of natural gas from shale formations began to grow rapidly. After 2020, natural gas production grows at a lower rate (1.0% annual average) in the Reference case as net export growth moderates, energy efficiencies increase, and natural gas prices slowly rise.

Natural gas production and trade vary with different assumptions for resources and technology, macroeconomic growth, and world oil prices. In the High Oil and Gas Resource and Technology case, larger natural gas resource estimates and improved drilling technology lead to higher domestic natural gas production, lower U.S. natural gas prices, and therefore, greater natural gas exports. Most of the increase in natural gas trade is from LNG exports, which grow to 8.4 Tcf (23 Bcfgd) in 2040.

However, LNG exports are highest in a case with high world oil prices. In the High Oil Price case, when consumers move away from petroleum products when other energy sources become economically favorable, global LNG demand increases and U.S. LNG exports reach 9.2 Tcf, or 25 Bcfgd. Compared with other LNG suppliers, U.S. LNG has the advantage of domestic spot prices that are less sensitive to global oil prices.

Conversely, in a scenario with more pessimistic assumptions for oil and gas resources and technology or a scenario with low world oil prices, LNG exports still increase, but remain below Reference case levels through 2040.

World Oil

The EIA’s base case projection would make the U.S. a dominant player in the global LNG market.

lng-exports-us

Figure 3.  EIA forecast of U.S. natural gas exports.  7 Tcf/yr = 19.2 Bcf/d          Source: EIA via World Oil

  • 19.2 Bcf/d = 3.4 mmBOE/d
  • Canada exported  3.2 million bbl/d of crude oil in 2013.

The EIA reference case would make the U.S. the “Canada” of natural gas exports.  It would also make our natural gas exports comparable to Russia’s at ~7 Tcf/yr.

eia-natural-gas-1

Figure 4.  EIA forecast of U.S. natural gas production and consumption.           Source: EIA via World Oil

us-lng-eia-2

Figure 5.  EIA forecast range of U.S. LNG exports.   Source: EIA via World Oil

http://www.worldoil.com/news/2017/2/24/eia-lng-exports-expected-to-drive-growth-in-us-natural-gas-trade

  • 26 Bcf/d = 4.6 mmBOE/d
  • Russia exported  4.9 million bbl/d of crude oil in 2013.

The “High Oil Price” scenario would make the U.S. the “Russia” of natural gas exports.

U.S. exports of LNG are ramping up rapidly.

100th LNG Cargo Shipped from Sabine Pass Liquefaction Facility

Cheniere Energy announced today the 100th cargo of liquefied natural left the company’s Sabine Pass liquefaction facility on Saturday, April 1st, 2017. Including the 100th cargo, Cheniere has delivered cargoes to 18 countries on five continents since the first shipment on February 24, 2016.  “This milestone for Cheniere is a testament to the global demand for American LNG, the hard work and dedication of Cheniere’s workforce, and our unique business model that enables customers large and small to access this fuel,” said Jack Fusco, Cheniere’s President and CEO. “Our entire workforce shares in this milestone and in Cheniere’s future success.”

In February 2016, Cheniere became the first company to ship LNG from the contiguous United States in over 50 years.

[…]

LNG Global

By the end of 2018, the U.S. will be a net exporter of natural gas:

COMMODITIES | Wed Mar 29, 2017 | 6:38am EDT

After six decades, U.S. set to turn natgas exporter amid LNG boom

By Scott DiSavino

The last time the United States was a net exporter of natural gas was in 1957, when Dwight Eisenhower was president. That should change in 2018 when the country is expected to become the world’s third-largest exporter of liquefied natural gas (LNG).

By the end of next year, U.S. LNG export capacity in the lower 48 states will top 6 billion cubic feet per day (bcfd), or 8 percent of the country’s domestic consumption, up from zero at the beginning of 2016. Six bcfd of gas can fuel about 30 million U.S. homes, or almost every house in California, Texas and Florida combined.

That growth in U.S. LNG exports is set to transform world energy markets. Just a decade ago, before the shale revolution, the United States was expected to become a growing LNG importer, not an exporter, likely dependent on Russian, Middle East and North African gas, much as it has for decades depended on foreign crude.

[…]

Reuters

There are currently two LNG export terminals operating in the U.S.  Kenai AK, ConocoPhillips, has been in operation since 1969.  It has a capacity of 0.2 Bcf/d.  Sabine LA (Cheniere) has only been in operation for about 1 year.   It has a capacity of 1.4 Bdf/d.

LNG_Term_Exist

Figure 6. Existing LNG terminals.  Source: FERC

 

LNG_Term_Approv

Figure 7.  Approved LNG export terminals.  Source: FERC

 

LNG_Term_Prop

Figure 8.  Proposed LNG terminals.  Source: FERC

 

 

Natural Gas08

Figure 9. U.S. natural gas production, imports, exports and LNG export capacity,                    Source EIA and FERC

 

Figure 9.  U.S. natural gas production, imports, exports and LNG export capacity.                  Source: EIA and FERC

  • 16,111 Bcf/yr = 44 Bcf/d
  • 44 Bcf/d = 7.8 mmBOE/d
  • Saudi Arabia exported  7.4 million bbl/d of crude oil in 2013.

If all of the approved and proposed LNG export terminals are built and operate at full capacity, the U.S. would become

Can we “get there from here”?  Is there enough natural gas in the ground for the U.S. to become the “Saudi Arabia” of natural gas.

 

Reserves and Resources

To answer that question, we have to get a handle on the size of the resource base.

Proved Reserves

Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations.

If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

SPE

Proved reserves are often referred to a “P90” or 1P.  There is a 90% probability that this much gas will be produced.  People often make the mistake of thinking that proved reserves are a fixed number, which will go down with production.  In fact, proved reserves represent the minimum volume that is expected to be produced.  Proved reserves can move up and down simply dud to changes in product prices.

Probable Reserves

Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves.

In general, probable reserves may include (1) reserves anticipated to be proved by normal step-out drilling where sub-surface control is inadequate to classify these reserves as proved, (2) reserves in formations that appear to be productive based on well log characteristics but lack core data or definitive tests and which are not analogous to producing or proved reservoirs in the area, (3) incremental reserves attributable to infill drilling that could have been classified as proved if closer statutory spacing had been approved at the time of the estimate, (4) reserves attributable to improved recovery methods that have been established by repeated commercially successful applications when (a) a project or pilot is planned but not in operation and (b) rock, fluid, and reservoir characteristics appear favorable for commercial application, (5) reserves in an area of the formation that appears to be separated from the proved area by faulting and the geologic interpretation indicates the subject area is structurally higher than the proved area, (6) reserves attributable to a future workover, treatment, re-treatment, change of equipment, or other mechanical procedures, where such procedure has not been proved successful in wells which exhibit similar behavior in analogous reservoirs, and (7) incremental reserves in proved reservoirs where an alternative interpretation of performance or volumetric data indicates more reserves than can be classified as proved.

SPE

Probable reserves are often referred to a “P50” or “2P.”  There is a 90% probability that this much gas will be produced.  “2P” is also used as a connotation for “proved plus probable.”  Probable reserves are one of the mechanisms by which proved reserves can grow without additional drilling.  2P reflects the most likely volume that will be produced.

Possible Reserves

Possible reserves are those unproved reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves. In this context, when probabilistic methods are used, there should be at least a 10% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves.

SPE

Technically these are resources, not reserves.  Referred to as “P10” or “3P,” this represents the maximum volume that will be produced.  3P generally refers to “proved plus probable plus possible.”

SEC regulations only require publicly traded oil & gas companies to report proved reserves.  Although probable reserves can also be reported for valuation purposes.

The U.S. Energy Information Administration compiles proved reserve data, which can be accessed through their website.

In order to become the “Saudi Arabia” of natural gas, the U.S. would need to produce about 70% more gas than it currently does.  Do we have the gas resource base to “get there from here”?

The answer is: Yes.

Natural Gas01

Figure 10.  U.S. natural gas proved reserves, proved reserves – production and production (Bcf).  Source: EIA

Natural Gas06

Figure 11.  U.S. natural gas proved reserves in years of production.  Source: EIA

Proved reserves are only a fraction of the resource base.

NGResources

Figure 12. U.S. natural gas resources.  Source: NGSA

 

P50 probable reserves (1P+2P) are nearly three times that of P90 proved reserves.

Natural Gas04

Figure 13.  U.S. natural gas proved & probable reserves and resources (Bcf). Source: EIA and NGSA

Natural Gas07

Figure  14.  U.S. natural gas proved & probable reserves and possible resources in years of production.  Source: EIA and NGSA

 

What Stands in the Way of the U.S. Becoming the Saudi Arabia of Natural Gas?  Natural Gas Prices

Low natural gas prices in the U.S. are the primary reason that proved natural gas reserves declined in 2015.

chart (3)

Figure 15.  U.S. natural gas wellhead price ($/mcf).  Source: EIA

 

Print

Figure 16.  “Breakeven” prices ($/mcf) for major U.S. shale gas plays.

With U.S. natural gas prices currently around $3.30/mcf, typical shale gas wells are not breaking even, much less yielding a decent return.

To yield a 10% unleveraged return, the shale plays require gas prices of $4.50 to $5.50/mcf.

For natural gas, the dry Marcellus would require a NYMEX gas price of at least $4.55 to generate a 10% unleveraged return, said KLR. The region’s low capital intensity is partly offset by a lower gas price realization.

KLR NYMEX Gas Breakevens

The Fayetteville requires a NYMEX-normalized natural gas price of about $5.50 per Mcfe to generate a 10% return, making it the most expensive natural gas play among those examined by KLR. The Fayetteville was the only basin in last week’s Baker Hughes rig count to show zero activity as low prices continue to make the region uneconomical for new production.

Oil 360

While low U.S. natural gas prices are currently a drag on production and reserve growth, the also provide an advantage to domestic gas producers.  U.S. natural gas is extremely competitive in the global market.

JAN 31, 2016

The U.S. and Australian Race to Export Liquefied Natural Gas

Jude Clemente , CONTRIBUTOR
I cover oil, gas, power, LNG markets, linking to human development

Free market economies Australia and the U.S. will be in competition for the export of Liquified Natural Gas (LNG). Since 2010, Australia’s gas demand has increased 10%, but its gas production has increased 35%, compared to an 8% increase for use and 38% gain in production for the U.S. Per BP data, Australia and the U.S. have netted 75% of the 260 Tcf gain in proven global gas reserves since 2005.

In fact, through 2020, the two countries are expected to account for 90% or more new LNG exports. Overall, the global LNG market is set to increase by 50% between 2015 and 2020, nearly 20 Bcf/day. This year alone will see a 2.6 Bcf/day increase in LNG supply

Australia could add six new LNG export terminals by 2020, tripling its liquefaction capacity to over 13 Bcf/day. Although Cheniere Energy’s U.S. LNG export facility at Sabine Pass, the first of its kind in the continental U.S., was delayed until late-February or so, the country could be exporting 10 Bcf/day by 2020, almost equaling current global leader Qatar.

[…]

This year’s expansion of the Panama Canal will up competition in the U.S. to ship LNG to Asia, where over 70% of the world’s LNG is consumed. The U.S. has lower production costs and lower capital costs for new infrastructure, namely liquefaction facilities. Bolstered by the “shale revolution,” for instance, the more difficult Gulf of Mexico now produces just 5% of U.S. natural gas, versus over 25% 20 years ago

 This is in contrast to the expensive offshore gas projects in Australia, now responsible for over 50% of all floating liquefaction capacity under construction. Over 90% of Australia’s traditional gas resources reside in the harder-to-develop North West Shelf offshore.
Escalating labor costs have been a key factor in Australia’s drastic LNG cost overruns. In Australia, oil and gas workers can make $165,000, 30-35% more than in the U.S. and double the world’s average. One Harvard expert finds that “Australian LNG seems to be the worst business case globally,” with costs range being 2-3 times higher than in the U.S. (see here).

[…]

Daniel Yergin just said that the Saudi’s “will not destroy the US shale industry…It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale.” U.S. gas production is rising by 1.5% per year, three times faster than consumption (projections here).

Thus, U.S. gas prices will remain lower than in other markets, and arbitrage opportunities for companies to ship LNG will remain. North America’s gas prices are mostly set at liquid trading hubs, more linked to supply and demand fundamentals.

The key importing nations are not expected to be producing much more gas, so the internationally traded market will increase its current share of 30% of total gas consumed, closer to the 60% of oil demand that is traded internationally. Making gas more of a global commodity like oil, LNG now accounts for about 33% of all traded gas and 10-12% of total gas demand. The LNG market is just another example of the obvious: the world continues to become more connected, not less.

Screen-Shot-2016-01-25-at-12.47.04-PM1

[…]

Forbes

 

 

U.S. gas producers can undercut the price of the competition.  Outside of North America, LNG is currently trading at $5-6/mcf, 50-60% above the breakeven price of the shale plays.

LNG Prices

Figure 17. Global LNG prices ($/mmBtu).  Source: FERC

Natural gas demand rising, particularly in non-OECD nations:

figure_3-1

Figure 18. Projected world natural gas consumption (Tcf). Source: EIA

Conclusion

With most export markets currently paying more than $5.50/mmBtu, global natural gas demand on the rise and most of the rest of the world paralyzed by an irrational fear of fracking (no arguments about the spelling, please), the U.S. could easily become the “Canada” of natural gas and clearly has the potential to become the Saudi Arabia of natural gas.

U.S. LNG Export Potential

BOE/DAY
Proposed LNG Capacity    7,799,490
EIA High Oil Price Case    4,594,200
EIA Base Case    3,388,767

 

Top 10 Crude Oil Exporters

RANK COUNTRY (BBL/DAY) DATE OF INFORMATION
1 SAUDI ARABIA 7,416,000 2013 EST.
2 RUSSIA 4,888,000 2013 EST.
3 CANADA 3,210,000 2015 EST.
4 UNITED ARAB EMIRATES 2,637,000 2013 EST.
5 IRAQ 2,462,000 2013 EST.
6 NIGERIA 2,231,000 2013 EST.
7 ANGOLA 1,745,000 2013 EST.
8 KUWAIT 1,711,000 2013 EST.
9 VENEZUELA 1,548,000 2013 EST.
10 KAZAKHSTAN 1,466,000 2013 EST.

Source: CIA World Fact Book

 

Further Reading

EIA Annual Energy Outlook 2017

Featured Image

Cheniere Energy

 

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