If you are in the United States and in the liquefied natural gas (LNG) business, you are probably a little uncomfortable. The single export facility in Alaska ran out of natural gas and the 12 import facilities have no business. The U.S. is flooded with natural gas and there is no chance anyone will need to import LNG for a long time.
Just a few years ago, experts warned that the U.S. was running out of natural gas. It seemed clear the nation would need to import a lot of it, and the only way to import natural gas from distant sources is by ship. Logically, several forward-thinking executives decided to build LNG import facilities and tie those facilities to the nation's natural gas pipeline system.
Twelve import terminals were constructed to accept LNG, store it, regasify it and reconvert it to natural gas. Seven are in the Gulf of Mexico and five are spread across the Atlantic Coast. Eleven more have been approved by the federal government and are ready for construction.
In all likelihood, none of the 11 will be constructed. The experts who warned the country it was running out of natural gas did not consider the vast amounts of shale gas available in Marcellus, Utica, Antrim, New Albany, Avalon-Bone Spring, Hilliard-Baxter, Monterey and the dozen other shale gas plays located throughout the lower 48 states.
Those experts also were unaware of all the shale gas in neighboring Canada. It turns out that Canada has at least eight separate shale plays with reserves in place totaling 1,380 trillion cubic feet. Unlike in the U.S., a significant proportion of Canada's shale gas is located in the western provinces.
With all this natural gas suddenly appearing on the market, the 12 import facilities currently operating in the U.S. will sit idle for a long time. Owners like Cheniere (LNG) and Dominion Resources (D) have come to the realization that they suddenly have stranded assets in their LNG import terminals.
Cheniere and Dominion believe they can recover some of their pipeline, storage facility and loading assets if they add liquefaction capabilities at existing sites. This additional investment would allow them to reuse previously stranded assets and reverse the flow of natural gas.
This process is not as simple as it appears. First, Cheniere or Dominion must secure multi-decade offtake agreements to hedge their multi-billion investments in new liquefaction equipment, or speculate. Speculation is what got them into this mess.
Second, the U.S. has significant economic challenges to export LNG:
- The discovery of shale gas is not just a U.S. phenomenon, it's worldwide.
- From a feedstock and LNG production perspective, the U.S. can never be a cost leader.
- From a transportation and delivery perspective, the U.S. can never be a cost leader.
- LNG cannot compete with traditional pipeline gas.
Some European utilities may switch from nuclear power to gas-fired power plants. That switch may create additional demand for natural gas, but that demand can be met with new shale gas recently discovered in Europe. Like the U.S., Europe has discovered vast amounts of shale gas. Also, Europe already has a diversity of other suppliers, including one from the world's cost leader, Qatar. Added to that diversity is a proposed $10 billion Nabucco Pipeline, which would deliver traditional natural gas from the Caspian region nonstop to Europe.
The big LNG market is not Europe; it's Asia. Except for Alaska, the U.S. has no LNG capabilities on its West Coast, so most LNG exports must originate from the Gulf and East coasts. This means U.S. LNG must travel longer distances and traverse more costly routes. Cost leadership for transportation is impossible.
The other problem for U.S. exporters is the potential competition for Asian business. Russia has vast amounts of traditional natural gas located on its Pacific coastline. Australia also has major discoveries that are being developed by Shell (RDS.A). Qatar and Iran sit on the world's largest gas field. All of these wells are traditional gas plays, none use costly fracking, all are located near the customer, and all enjoy lower cost profiles.
Finally, unlike crude oil, natural gas is not an internationally priced commodity (yet). Cheniere and Dominion must acquire natural gas at Henry Hub prices or higher. They also must pay more to convert their natural gas into LNG.
Foreign producers have a completely different cost structure all along the value chain. If there is a price war, U.S. gas is likely to be the first casualty.