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LNG v. Unconventional Gas Sources In North America

February 2nd, 2010 by Sophia Ruester, Florence School of Regulation (European University Institute, Florence)

Nothing has altered the North American natural gas market and its appetite for LNG as severe as the discovery and development of significant unconventional gas sources. Within a couple of years, the supply-demand balance has changed from one of continuous production declines to one of an upcoming surplus.

Rising natural gas prices since 2001, easy financing and technological innovations (i.e., horizontal drilling and hydraulic fracturing) encouraged companies to invest in wells. Amongst others, large deposits were explored with the Barnett Shale and Eagle Ford plays (both in Texas) and the Haynesville Shale (Louisiana). The Potential Gas Committee states in its 2008 assessment report that the US alone might possess a total resource base of 51,200 bcm which would increase the static reserves-to-production ratio from about ten to 90 years. In Canadian British Columbia, the Horn River Shale Basin is estimated to comprise about 14,000 bcm.

Development of North American LNG imports and nominal import capacity

Figure 1: Development of North American LNG imports and nominal import capacity

The substantial rise in unconventional gas production reversed the historical decline in US gas output reducing demand for LNG. In the early 2000s, researchers still saw North America as a major player in the future LNG market. The EIA regularly adapted its annual energy production and consumption forecasts. In 1999, most domestic production was expected from conventional natural gas with unconventional sources projected to account for not more than 200 bcm in 2020 and LNG imports were forecasted to remain at marginal levels. The 2004 outlook five years later predicted unconventional production to increase to 255 bcm and LNG imports to rise to 140 bcm in 2025. In its latest outlook, future unconventional natural gas production has been adjusted further upwards (340 bcm in 2025 and 400 bcm in 2030) whereas the prospects for LNG imports with 30 bcm in 2030 are less enthusiastic.

The future potential for natural gas production from unconventional sources, however, will mainly be determined by the level of natural gas prices and the development of production costs. Each shale play has its individual geological characteristics; no general statement on the cost structure can be made. Dar (2009) quotes the break-even price at 3.88 USD/MBTU (Eagle Ford), 3.74 USD/MBTU (Marcellus), 4.49 USD/MBTU (Haynesville), and 5.18 USD/MBTU (Barnett). This goes in line with Jensen (2009) arguing that much shale gas could be developed at natural gas price levels of 4 USD/MBTU. Berman (2009), in contrast, argues that only half of the Barnett Shale wells would be economic at prices of 10 USD/MBTU and expects a drop in drilling activities as a response to the lower prices since mid-2008. Whether current production levels can be maintained at prices below 5 USD/MBTU is one of the major uncertainties for the mid-term future.

As a consequence of the increased domestic production, needs for imports declined. For the shortterm, this trend is further amplified by the recent demand downturn due to the economic crisis. US LNG imports dropped in 2008 to 9.9 bcm from 21.8 bcm in 2007. Import terminal operators suffered from idle regasification capacities. The load factor of total North American LNG import capacity fell from 61% in 2004 to 8% in 2008 (see Figure 1). It is very likely that beside the completion of projects already under construction, no significant investments in LNG capacities will be realized in the midterm future. Some LNG terminal operators even have already sought permission from FERC to add export equipment to their facilities. Since North America was expected to be a major growth market for LNG, this development has a severe impact on the future global LNG demand.

Sophia Ruester, Dresden University of Technology

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One Response to “LNG v. Unconventional Gas Sources In North America”

  1. Hamza Fawzi Says:

    The substantial increase in unconventional gas production in the US will very likely contribute to the reduction of LNG prices (with respect to the “business as usual” scenario), as it will help ease off the demand of LNG in the US, as Sophia Ruester shows in the post. This will certainly be good news for fast-developing countries in Asia (i.e. China and India) whose soaring gas demand over the past years has largely contributed to the increase of LNG prices (LNG prices increased by 180 percent from 2005 to 2008 [1]).

    Furthermore, the decline of LNG demand in the US will push LNG carrier ships towards Eurasia, which would benefit Europe to diversify its sources of natural gas: Indeed the recent disruptions of Europe’s gas supply as a result of political conflicts between Russia and Ukraine, is worrying the EU in terms of security of supply. LNG would be one way to help Europe diversify its natural gas sources and reduce its dependence on gas pipelines from Russia.
    This would require Europe to invest in LNG infrastructure in order to have the capacity to process and regasify larger amounts of liquefied natural gas. In fact, Europe already plans to more than double its current LNG regasification infrastructure by 2015 to around 25 billion cubic feet per day from its current 11 billion cubic feet per day [1].

    Following the US, the EU is also starting to invest in unconventional gas, and is seeing it as a potential means to diversify even more its supply of natural gas. Indeed, shale gas exploration is under way in southern France, Germany and Poland. European producers are engaging in joint ventures with American companies that operate shale gas in order to acquire the necessary technology, expertise and experience. Total has paid out US$2.25bn for a 25 per cent stake in Chesapeake’s Barnett assets, with US$1.44bn of this sum to be spent on financing drilling in the Barnett shale in Texas to 2012 [2]. Norwegian company Statoil has also entered a joint venture with Chesapeake Energy to produce shale gas this time in eastern US.
    But the potential benefits and fruits of these joint ventures (i.e. drilling shale gas in Europe en masse) are likely to take some time: In fact, there was a lag of about 16 years between the beginning of massive R&D investments (early 1980s) by US gas producers, and substantial increase in unconventional gas production in the US (late 1990s) [3]. Europe can however benefit from existing US experience and technology in the field, in order to reduce this lag.

    [1] Energy Tribune, Europe looks to LNG by Andres Cala (March 20th, 2008)
    [2] Industrial fuels & power, The rise of unconventional gas by Samuel Fenwick (March 26th, 2010)
    [3] Energy Bulletin, US natural gas: the role of unconventional gas by Gail Tverberg (May 18th 2008)

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