Analyst warns of global LNG glut by 2018

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February 14, 2012

(Bloomberg; Feb. 13) - Liquefied natural gas markets may face a glut by 2018 as about 12 trillion cubic feet a year (almost 33 billion cubic feet a day) of new supply could come online, according to Sanford C. Bernstein & Co. Already eight major LNG projects have been approved in Australia in the past two years, creating almost 3.4 tcf a year of new capacity, according to the report from the global asset-management and research firm.

Besides the eight projects in Australia, other projects worldwide that are planned but have yet to reach the final investment-decision stage might add 3.2 tcf a year of supply by 2020, the company said in a research note Feb. 13. Additional projects at a more speculative stage could potentially add a further 8.8 tcf a year of new capacity, Neil Beveridge, an energy analyst at Bernstein in Hong Kong, wrote in the report.

"Despite the short-term tightness, a new wave of long-term LNG investment is building, which will lead to a massive increase in global LNG capacity by 2016/2017 and could ultimately spark the next global glut of LNG," Beveridge wrote.  Spare capacity is expected to reach historic lows in 2013, with few LNG projects scheduled to begin operations before then as demand increases, according to the report.

Fitch questions long-term risk of U.S. LNG export terminals

(MarketWatch; Feb. 13) - Fitch regards the measured conversion of some U.S. LNG import terminals to allow the export of liquefied natural gas as positive. However, currently favorable margins for U.S. LNG exports may not be sustainable and could set up long-term risks for the new infrastructure projects, the ratings service said Feb. 13.

"We expect the Department of Energy to continue to grant licenses to construct or reconfigure LNG terminal facilities to increase the volume of exportable resources," Fitch said. "However, several risks have been identified in this scenario that could disrupt this expansion and the securities funding them. Most pricing projections for LNG assume that fracking will continue to be used. The immediate future is uncertain as the short- and long-term potential environmental impacts are examined.

"We also see the potential for exploitation of shale gas reserves in many other countries," Fitch said. "Some have significant advantages over U.S. distributors. The largest buyers of LNG are South Korea and Japan. Vast shale gas deposits exist in nearby China. ... Should discoveries of nonconventional natural gas flourish there, the combination of low labor costs and small shipping cost due to the proximity of these countries could lessen the traffic at U.S. terminals constructed to export natural gas."

Asia LNG prices steady at $15;
Japan may hit limit for burning gas

(Reuters; Feb. 10) - Asia LNG spot prices for March delivery held steady below $15 per million Btu, remaining firm for two weeks now after an eight-week slide. Competition for cargoes is coming from Europe, where demand increased after Arctic temperatures and heavy snow brought half the continent to a standstill. "The weather's colder and that's supportive (of prices)," an Asia-based trader said.

Japan remained the focus of the market in Asia, with questions remaining about whether it will be able to restart its nuclear reactors after last year's earthquake, and how many might restart. "The consensus is definitely shifting to the idea that there will be some restarts," the trader said.

Even if more nuclear reactors are shut down, however, it is unlikely that more LNG can be used as a substitute. "They are pretty close to capacity. The power sector is hitting a physical limit (almost 10 billion cubic feet of gas per day). ... They just can't burn more LNG," he said.

Indonesia 'exploring' possibility of importing U.S. LNG

(Jakarta Post; Feb. 13) - Indonesia LNG buyers are ready to take advantage of falling gas prices in the U.S. Amid difficulties in securing gas allocations from domestic sources, Indonesia gas users, including state oil and gas firm PT Pertamina and state power utility PT PLN, have expressed their interest in "exploring" the possibility of importing LNG from the U.S.

PLN oil-based fuels and gas division head Suryadi Mardjoeki said some U.S. gas producers had approached the company and made offers, however no deal has been made to date. Buying gas from the U.S. would also be more reasonable than importing from the Asia market since the price in the U.S. is based on production costs not linked to the fluctuating global oil price as in Asia, he added.

"We're basically very interested in importing LNG from the U.S., however we need the gas next year, while most of the U.S. producers will only start deliveries in 2018," he told The Jakarta Post recently.

Koch Industries gets in on LNG trading business

(Reuters; Feb. 10) - The energy trading division of U.S. conglomerate Koch Industries launched its LNG business last week with an eye on lucrative routes to Asia as demand there soars. Cargoes of LNG are changing hands for more than $40 million per tanker load as sales into Asia boost trading profits among established industry players such as BG Group which recently its upped LNG profit targets for 2012 by 30 percent.

Koch Supply & Trading said it plans to build a Europe-wide natural gas business from Geneva and an LNG trading business from offices in Houston, London, and Singapore. Origination and marketing support locations are also planned for the near future in East Asia, the Middle East and Latin America.

Koch Industries, based in Wichita, Kan., is one of the largest privately held companies in the world. It has interests in commodity trading, forest products, chemicals, refineries, minerals and fertilizers, including the Flint Hills refinery at North Pole, AK.

Analysts believe shale gas production will take time in China

(Bloomberg; Feb. 14) - China's ambition to unlock natural gas trapped in shale is likely to take longer than planned, boosting its reliance on overseas supplies. China's shale gas annual output will rise to more than 800 billion cubic feet in 2020, or 29 percent of the government's target, under the average estimate of seven analysts surveyed by Bloomberg. The shortfall, stemming in part from tougher geology, should boost LNG imports while curbing speculation that China can quickly duplicate the U.S. shale boom.

Drillers in China, the world's biggest holder of shale reserves, have yet to produce shale gas commercially, with Shell helping China National Petroleum to sink the nation's first horizontal well. CNOOC and China Petrochemical, which have invested more than $5.7 billion in unconventional oil and gas overseas, have found technology lacking at home. "There are resources in China but the geology is different and more challenging than in the U.S.," said Liu Zhenwu, a vice president at state-run CNPC's advisory center.

"Technical issues need to be solved first. It may take a few years, maybe a decade, maybe more, before large quantities of shale gas are produced in China," he said. Until then, China will need to boost purchases of LNG to meet demand. The nation imported an average 1.2 billion cubic feet of gas a day in 2011 as LNG. Paris-based GDF Suez estimated shipments could almost quadruple by 2020 (an additional 3.5 bcf per day).

China's resources ministry commits
to shale gas appraisal work

(Forbes; Feb. 13) - The Chinese government will step into fifth gear this year when it comes to exploring for natural gas hidden under thick shale rock beneath the Earth's surface, an official said over the weekend. China has been promising to move forward on shale gas production for the past two years.

The Ministry of Land and Resources said Feb. 12 that China will strengthen the survey and appraisal of shale gas in 2012 to expedite discovery and development of its shale deposits. The move comes after the recent approval of the State Council in the capital to list shale gas as an independent mineral resource. China is slowly moving toward producing its shale gas.

Pipeline shortage pushes Bakken oil down to $70 a barrel

(Wall Street Journal; Feb. 10) - Want to lay your hands on some oil at just $70 a barrel? Turns out you can at Clearbrook, Minn. Question is what you will do with it once you own it. Much of the oil coming out of fields in the Bakken basin underlying North Dakota and Montana, as well as Canada, flows through pipelines that meet at Clearbrook, a Midwest oil hub like the bigger one at Cushing, Okla. In the past week or so, the price of oil delivered at Clearbrook has plummeted from about $95 a barrel to $70.

The reason for Clearbrook crude's big discount to West Texas Intermediate (about $98 last week) is much the same as for WTI's big discount to Brent (around $118 last week): logistics. The volume of oil heading into Clearbrook has surged from the Bakken Shale and from Alberta's oilsands. Pipeline capacity of about 425,000 barrels a day coming out of the Bakken basin is full, said Anish Patel, an analyst at research firm ISI Group. Expansions to capacity are coming but not until mid-2012 at the earliest.

In the meantime, producers are relying on trains and trucks to move some of the excess crude toward refineries, where it can be turned into useful products like gasoline. That is great for the likes of Burlington Northern Santa Fe, the railroad owned by Warren Buffett's Berkshire Hathaway. But it also is expensive. If the price of oil coming from the Bakken drops below $65 a barrel, that might force some producers there to scale back development, Patel said.

Pennsylvania drilling deal limits local zoning control

(Philadelphia Inquirer; Feb. 12) - When Pennsylvania legislators agreed last week to charge a new impact fee on natural gas drilling, the money came with a catch. The measure also imposed statewide zoning and land-use rules for pipelines and wells, summarily killing off dozens of local land-use ordinances in the process.

The governor had pushed hard for the measure, saying the industry needs standardized rules to flourish. Among other provisions, the new law stipulates that wells and pipelines must be permitted in every zoning district, including residential neighborhoods. It also forbids communities from making drilling operations a conditional use, a zoning tool many communities already have employed to impose strict conditions on where and how drilling sites and pipelines can be built.

One such community whose zoning ordinance that is no longer enforceable is Robinson Township in western Pennsylvania. The township had made all drilling a conditional use. "It's void," said Brian Coppola, a Republican township supervisor. "Everyone's ordinance in this state has become void. They threw the whole system of government out of the window." In Coppola's view, the industry was happy to trade paying the new drilling fee for a statewide set of land-use rules that makes it easier to do business.

Maryland lawmakers look at adopting
natural gas production tax

(The Washington Post; Feb. 13) - Sharp disagreement has surfaced in the Maryland legislature over how much to tax natural gas production if the state allows companies to drill for shale gas deep below the state's westernmost counties. Two House members Feb. 10 introduced a bill that would set the rate at 15 percent of the wholesale value of production from Maryland's portion of the Marcellus Shale. That's six times the rate proposed by a state senator, who earlier introduced a bill to set the rate at 2.5 percent.

Though the mechanisms differ, both bills propose to use the resulting revenue in the affected areas to address the potential environmental and public health impacts of gas production. But the wide gap between the proposed tax rates in the House and Senate versions creates uncertainty about the chances of compromise and passage of a unified bill.

House of Delegates Member Heather Mizeur said Maryland should not allow drilling without first passing a "competitive" severance tax that also ensures Maryland is able to oversee the industry. It is not known how much gas lies trapped in Maryland's portion of the Marcellus Shale because no wells have been drilled. The state is unlikely to issue drilling permits before August 2014, when it is scheduled to complete a three-year study of shale gas drilling.

Pennsylvania takes on oversight of gathering lines

(Philadelphia Inquirer; Feb. 12) - Pennsylvania regulators are taking steps to begin safety checks of some natural gas pipelines in the Marcellus Shale region - hiring inspectors and drafting new rules that will bring the state in line with the rest of the nation. But a dispute continues over whether the state oversight goes far enough. The new safety and construction regulations still will not apply in the most rural areas of shale country. Federal officials are pushing to close that rural loophole.

But the gas and pipeline industries are fighting hard to keep it in place, arguing that the hazards are remote and the cost would far outweigh any benefits. Some residents say their safety doesn't seem to count. "I guess they feel if it is in a rural area, it's not that much of a problem," said Nancy Liebert, an environmental activist in a picturesque town in Sullivan County. The industry is building gathering lines in rural areas with virtually no safety oversight. (Gathering lines typically link wells with interstate pipelines.)

Unlike other gas-producing states, Pennsylvania had never taken on the job to enforce federal laws for those types of pipelines. That changed in December, with a new law giving the job to the Public Utility Commission. Pipeline company per-mile fees will pay for the increased enforcement. The agency is working to hire seven inspectors and two more supervisors for the increased workload. But they won't be on the job anytime soon. There's a waiting list at the nation's only training academy for pipeline inspectors.

EPA investigating impacts of natural gas
drilling in Pennsylvania

(The Associated Press; Feb. 13) - The EPA last September opened an investigation into the impact of natural gas drilling in southwestern Pennsylvania. "The EPA is assessing the findings of our air, water and hazardous waste investigations in Washington County," said Bonnie Smith, an EPA spokeswoman in Philadelphia. The agency will not disclose the names of the facility or facilities where testing has been done until the investigation is complete, which will take several more months.

Washington County, just south of Pittsburgh, is a hotbed of Marcellus Shale gas development. It has more wells and compressor stations, which pump natural gas through pipelines, than any other county in the region. Smith said concerns over the potential environmental impact of drilling are behind the probe.

EPA has done at least one investigation to test air, water and land effects in Pennsylvania in each of the past five years, Smith said. Such investigations can target single facilities, multiple facilities or environmental problems in a given area. Katy Gresh, a Pennsylvania Department of Environmental Protection spokeswoman, declined to comment on the EPA probe or say whether the state is participating in it.

Low natural gas prices cut into Wyoming state budget

(NPR; Feb. 13) - After more than doubling its state budget over the past decade, it's time for Wyoming to cut back. During the state budget session that begins Feb. 13 legislators will attempt to trim budgets by at least 8 percent over the next three years. Wyoming's tax revenue mostly comes from oil, natural gas and coal. The state does not have a state income tax. Because of high energy prices, Wyoming has spent millions of new dollars on education and construction.

But recently, the price of natural gas has plummeted, and with it state revenues. For every dollar gas prices drop, Wyoming can lose up to $120 million a year in revenues. "I'm a person that believes that you don't wait for your problems to get worse. You begin to address them as soon as you can see that you have a problem," said State Sen. Phil Nicholas, who co-chairs the Joint Appropriations Committee.

"We don't want to get in a position where we cannot pay our bills. And so, I think we need to prepare - maybe prepare for the worst and hope for the best," said Gov. Matt Mead. Wyoming is making these cuts at a time when the state has roughly $1.5 billion in the bank waiting for a rainy day.

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