Good article today in WSJ about the race to take advantage of cheap shale gas by industrials building new plants, and states vying for the business. It is a new industrial revolution in the US, being driven by abundant, inexpensive natural gas from shales.
But competing with the industrials (and power plants) for these cut-rate hydrocarbon molecules are the exporters who want to liquefy the gas in huge cryogenic plants, load it on oceangoing vessels and ship it to Latin America, Europe, the Far East and other world markets. LNG exports have received a lot of press over the past few weeks. Could this happen? And if so, what would it do to the prospects for our new industrial revolution?
Well, never say never. But it seems to me that the chances for LNG exports in commercial (read “economically viable”) quantities are in the slim to none range. Not that there won’t be enough gas to export. Unless the federal government screws it up, there certainly will be. Instead the problem is risk – in three flavors – huge capital costs, uncertain domestic politics, and impending global competition. Let’s look at each one of these issues.
First, these things ain’t cheap. Cheniere’s contract with Bechtel for Sabine Pass liquefaction facilities anticipates $4.5-$5 Billion in construction costs. Someone – either committed shippers, Cheniere or both will be taking on the risk that this investment will pay out. Which gets us to domestic politics.
Yes, The DOE approved Cheniere to export domestically produced LNG from Sabine Pass, LA. But second thoughts may already be kicking in. In a presentation to the US Association of Energy Economists back in October, Chris Smith, Deputy Assistant Secretary for Oil & Natural Gas said that the DOE is now looking at concerns that exports could result in greater demand and higher prices. The WSJ picked up similar comments in another LNG story last week. This is happening when prices are at $3/MMbtu.
Well guess what. One of these days several market factors like a hurricane, a hot summer and an industrial resurgence will converge to spike gas prices back into the double digits. It may not last for long, but what do you think will happen when tight supplies are shipped to the Far East (where prices are higher still.) Yup, higher domestic prices. Can’t work any other way. Sounds like a recipe for knee jerk government action to me. DOE can revoke Cheniere’s permit anytime it is deemed to be in the nation’s best interest. And the nation (read voters) like low energy prices.
That gets us to the third risk – global competition. The US is not the only country with shale formations. Gas producers are fanning out on every continent to see what the potential could be. It is no secret that international energy companies are partnering with and investing in US producers to learn about shale so they can export the technology overseas.
Eventually this exploration activity and the technology transfers will start to bear fruit – and that means increasing gas production volumes around the world. Most likely that happens long before investments in US LNG liquefaction facilities are paid out.
Investors and potential shippers may choose to look past these risks and put money into LNG export facilities anyway. There is ample precedent. Most of the terminals were completed as import facilities while the shale phenomenon was upending the US supply/demand balance. So one or more of these liquefaction plants could be built. But that doesn’t mean that they will ever make a buck. From here it looks like big risk for a questionable return.
