Group 5 Week 2: It is Time for the US to Unleash its Natural Gas Supplies Globally

Welcome back to our series of posts on U.S. Gas Exports. Last week, we discussed how domestic supply will shape future export policies.  This week we will focus on the immense opportunity presented the US: exporting liquefied natural gas (LNG) to the international market.  Next week’s post will focus on exports via pipelines to our regional neighbors and geopolitics while the last week will focus on international demand and a summary.  As discussed last week, the recent boom in domestic natural gas production has left the US significantly reducing net imports, with the high probably of net exports in the near future.  However, this rapid drop in imports has also led to a precipitous drop in domestic prices.  According the Energy Information Administration (EIA), prices dropped from a peak of $8.57/Mcf in 2008 to only $2.18/Mcf in 2016 – one Mcf is 1000 cubic feet. This decrease in prices has significantly impacted profitability of natural gas producers and resulted in limited drilling operations.  The number of drilling rigs operating throughout 2014 was around 2000 while the number throughout 2015 has dropped been below 1000 and continued to decline.  The two following figures below show the impact the price decline in 2015 had on drilling rig counts. 

The decline in natural gas prices and rig counts has significant ramifications to the US economy.  While low prices are a positive for consumers of natural gas and downstream products, the current pricing is not sustainable.  Exploration and production (E&P) firms are tapping into their cash reserves and limiting expenses until prices recover.  As shown in last week’s post, capital expenditures were expected to drop from the peak in 2014 of about $200 billion to $100 billion in 2016 for North America.  This $100 billion decrease impacts multiple sectors of the economy: the steel industry which supplies piping, construction firms which build pipelines, contractors who operate the drilling rigs and so on.  This depressed spending on capital expenditures will persist until prices recover sufficiently to support new drilling.  Therefore, while consumer may prefer the current low cost of natural gas, price increases are inevitable until E&P firms become profitable again.  Instead of waiting for domestic supply and demand to balance, there is another opportunity available to the US.  Given the current domestic oversupply, natural gas producers – and the US as a country - should look to LNG exports to shore up the domestic price since a rebound is inevitable and it will drive economic growth. 

First, a brief background into LNG.  Natural gas is typically been a regional commodity, using pipelines to transport it form one area to another.  In its gaseous form, natural gas does not transport well – such as by rail or tanker – since the energy density is too low.  To economically transport natural gas by a method other than pipelines, it must first be liquified.  The liquification of natural gas is a complex process which takes it from ambient temperatures to about -260°F (or -160°C), and in turn reduces the volume to 1/600^th the original size.  LNG can then be shipped anywhere in the world by sophisticated refrigerated tanker vessels.  However, nothing is free, and the same can be said about LNG.  The cost of converting natural gas to a liquid and shipping it to a destination port is approximately $2-3/Mcf.

Despite the conversion and transportation cost, current prices in both the US and international markets support the US exporting LNG.   Below is a figure provide by the Federal Energy Regulatory Commission (FERC), showing landed LNG prices throughout the globe.  Outside the US, prices range from $6/MMBtu (MMBtu is one million British Thermal Units) in Europe and Asia, to over $7/MMBtu in South America.  Even with transportation costs of $3/Mcf, there is tremendous upside to exporting LNG internationally.  Note the units here switch around between MMBtu and Mcf – thankfully the conversion factor is almost 1 (1 MMBtu equals 0.9756 Mcf). By developing the infrastructure to ship LNG, the US can turn its domestic supply of natural gas into a worldwide product.  This will help stabilize the price of natural gas in the US to ~$2-3/Mcf lower than the prevailing rate at import markets.

By opening up the international markets to US LNG exports, the benefits will be multiple.  First, there will be significant capital expenditure by the US E&P firms as production ramps up.  These capital expenditures will create waves throughout the US economy.  Steel producers will get significant orders for new piping, construction firms will build new pipelines, the number of rigs in use will increase significantly, and a considerable number of jobs would be created in the process.  Second, there are environmental benefits from using natural gas versus other forms of hydrocarbons.  Natural gas has less impacts to the extraction region than mining coal – which removes significant material from the earth.  Natural gas also burners cleaner than any other fossil fuel and is a significant improvement over the current standard in many countries.  Finally, there are significant geopolitical benefits to the US exporting natural gas.  The discussion on geopolitics is expansive and will be included in next week’s continuation of this subject.

One key question that needs to be addressed before shipping US natural gas worldwide is whether or not the US has enough to spare.  Below is a chart provided by the EIA, which shows the US has on the order of 300,000 Bcf (billion cubic feet) of proved reserves.  The US currently uses slightly under 30,000 Bcf of natural gas per a year – which puts about 10 years of proved reserves available.  However, as it may be noticed, the drop in proved reserves between 2014 and 2015 is greater than consumption.  This is because proved reserves mean it is economical at current prices.  Therefore, proved reserves will drop as prices go down.  Therefore, it is better to use technological feasible reserves.  The EIA currently estimates the US has around 2,474,000 Bcf of feasible natural gas reserves – which is enough for over 90 years at current consumption rates.  Therefore, there is plenty of natural gas in the US to support exports.

Lastly, there are currently 7 LNG export facilities approved and under construction in the US with an additional 4 approved but not yet under construction (see the figure below).  The 7 facilitates will have a total capacity of 10.35 Bcf/day and if the other 4 are built, the total will be up to 17.14 Bcf/day.  Given that this last number equates to 514 Bcf/month, or around $38 billion a year in possible export revenue.  Therefore, the US should encourage development of LNG export facilities and the infrastructure to support them since it can grow capital expenditures by US firms and help grow the US economy.  Below is an illustration of approved LNG facilities in the US and Canada.

Next week’s edition will discuss the opportunities to export natural gas to Canada and Mexico as well as the geopolitical intricacies of the US becoming a major exporter of energy.

Sources:

https://www.eia.gov/

https://www.ferc.gov/