RBN Energy

It seems like everybody and his uncle are planning new methanol production capacity in the U.S. The economics certainly are compelling. Low natural gas prices are attracting methanol projects like a magnet, especially to the Gulf Coast; domestic and foreign demand for methanol is rising; and methanol prices are as high as they’ve been in five years. But companies are always looking for an angle, a competitive edge, a chance to make their project the most cost-efficient—and profitable—of all. Today, in “Cheap Trick: ‘I Want You to Want Me(thanol)’”--we consider Valero Energy’s methanol initiative and its cheap trick: a plan to add 1.6 million to 1.8 million tons per annum (MMtpa) of methanol capacity for an investment of only about $700 million. That’s around half what it would normally cost.

Chemicals, gas-to-liquids (GTL), steel and other industries that consume large volumes of natural gas either directly or as a fuel, expecting the new era of low and stable gas prices to continue are planning tens of billions of dollars in new or expanded facilities in the U.S. But how many of those plans will become a reality? Could the much-anticipated industrial renaissance be undermined by the higher gas prices that might come with the approval of a few more LNG export terminals, new environmental regulations that spur still more gas-fired power generation, and higher natural gas exports to Mexico? Those are critically important questions to gas producers and marketers, who are struggling to figure out just how quickly—and how much—demand for gas will rise. Today we continue our exploration of industrial demand for natural gas.

Reversing the direction of flow on the eastern third of the Rockies Express (REX) pipeline would have a profound effect on natural gas markets throughout the industrial Midwest and the Midsouth. Not only would the plan significantly expand the regions’ access to gas from the Utica and western Marcellus shale plays, it would further erode the market shares held by traditional suppliers to those regions.   In this Part 3 of our series on the REX reversal we examine how moving large volumes of now-constrained gas west from southwestern Pennsylvania, Ohio and West Virginia would fundamentally change regional gas flow patterns, basis relationships, and even the operations of many pipelines.

The internal rates of return (IRR) for our model of a typical Haynesville dry gas shale well is in the low teens at today’s gas prices. That is a low return compared to the liquids rich plays that producers are concentrating on these days. The economics of shale well production are calculated the same way for liquid shale plays – there is just more uplift from the higher priced liquids output. And natural gas output continues to surge with associated gas from the liquid wells. Today we complete our analysis of shale production economics.