Natural gas market will correct itself in time

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January 13, 2012

(Wall Street Journal; Jan. 12) - The domestic natural gas market is looking increasingly out of whack. Despite a 32% drop in prices last year, onshore production rose 10% and is expected to rise another 4% this year, according to Barclays Capital. As a result, prices are expected to remain low for at least the next couple years. Eventually, the natural gas market is expected to correct itself, either by forcing companies to further slash development budgets or by luring in new customers.

Meanwhile, many producers have shifted their focus from gas to more profitable oil. Still, gas is often a byproduct of oil drilling, and some companies are opting to burn off the gas because they don't have a way to transport it. Some gas wells produce so much ethane - a valuable liquid used to make plastics - that companies will drill regardless of gas prices. In addition, some companies need to continue drilling so they don't violate lease terms on millions of acres of land - deals struck when gas prices were high.

Observers say a price recovery could take months, or even years. Over the longer term, an increase in gas-fired power plants could reduce the gas surplus. But not everyone thinks inexpensive gas will last long. Jon Wolff, of International Strategy and Investment Group, says "nearly all U.S. gas drilling is uneconomic." He expects significant declines in production in Louisiana and Pennsylvania this year as hedges expire and capital is used up. He expects a rebound to $4.50 per million Btu in the second half of this year.

India looks to U.S. for more LNG

(The Hindu; Chennai, India; Jan. 11) - India has decided to make a "strategic shift" in LNG sourcing with a "look U.S. policy" for contracting new import volumes. This follows an analysis by the Petroleum Ministry which showed that LNG imports from the Mideast were costlier than from the U.S. The decision was taken recently at a meeting on the import of natural gas, LNG and polymers.

The news comes just weeks after state-run GAIL India signed a deal for LNG from Cheniere Energy, which wants to build a liquefaction and export terminal on the U.S. Gulf Coast. "Imports of LNG from U.S. are cheaper and stable. This is the reason we are now looking towards the West," a Petroleum Ministry official said. The GAIL contract covers an average 450 million cubic feet of gas per day, with the price linked to Henry Hub, plus fuel for the LNG plant, plus about $2.50 per million Btu for liquefaction costs.

According to the minutes of the import group meeting held in December, it was pointed out that the price of LNG based on Henry Hub was cheaper by $2 to $3 per million Btu compared to natural gas based on an oil-index price from other sources. It was also decided to explore the possibility of securing more LNG volumes from the U.S. market.

India buyer likely to sign another deal for U.S. LNG

(Wall Street Journal; Jan. 13) - GAIL India expects to sign a deal within a month with Macquarie Energy to buy almost 100 billion cubic feet of gas annually for two decades from the Freeport LNG project on the U.S. Gulf Coast, a senior executive with India's largest gas distributor said. The executive said the deal would be linked to Henry Hub gas prices, instead of oil prices, providing less expensive gas for India consumers.

Macquarie Group's North American energy marketing and trading arm, Macquarie Energy, and Freeport LNG Expansion, are jointly developing and marketing liquefaction export capacity at the LNG receiving terminal in Freeport, Texas. The import terminal opened in 2008 and, like several of its Gulf Coast neighboring plants, may be expanded to also offer an export option, allowing the owners to deal in both markets.

GAIL in December agreed to buy more than 170 bcf a year of LNG for over 20 years from Sabine Pass Liquefaction, a unit of Cheniere Energy, owner of the Sabine Pass LNG receiving terminal in Louisiana that is looking to add liquefaction and export capacity to its operation.

Qatari oil minister says it's time to consider U.S. LNG exports

(Forbes; Jan. 11) - ExxonMobil invested $30 billion with Qatar Petroleum over the past decade to build the world's biggest collection of LNG export terminals in that gas-rich emirate. One of the expected destinations of that Qatari gas was the U.S., and the partners built the Golden Pass terminal, near Sabine Pass, Texas, on the U.S. Gulf Coast to receive the tankers.

But with the U.S. facing a glut of shale gas, and Golden Pass largely unused, Qatar's Oil Minister Abdullah bin Hamad al Attiyah says it's time to consider revamping the terminal so it can export U.S. LNG. In response to a question about reversing the direction of Golden Pass, Al Attiyah said: "I think yes, why not?" One reason why not is that by trying to sell U.S. gas into the global LNG market, Qatar and its partners (Qatar, 70%; ExxonMobil, 17.6%; ConocoPhillips, 12.4%) would compete with their own Qatari LNG.

This is all a huge change from just a few years ago, when the big players assumed the U.S. would need gas from the rest of the world. "People used to say that shale gas couldn't compete with natural gas," al Attiyah reportedly said. "In my 40 years in the industry, I have learned one thing: Don't believe in forecasts."

East Coast Canada LNG import terminal
in business for the long run

(CBC News; Jan. 13) - Low natural gas prices are not jeopardizing the long-term future of the Canaport LNG receiving terminal in Saint John, New Brunswick, according to the president of Repsol North America. Low gas prices have idled most other LNG terminals on the continent. But Phil Ribbeck, president of Repsol North American, said gas prices in the northeastern U.S., where his customers are, often are higher than in other parts of the country.

Ribbeck said the company is in Saint John for the long run with the expectation that prices will eventually turn around. "I don't know if that's going to keep up or not. But we don't worry about what's happening today," Ribbeck said. Spanish energy giant Repsol co-owns the liquefied natural gas terminal with Irving Oil. The terminal opened in September 2009, with the capacity to handle 1.2 billion cubic feet of gas per day. Reports are that it is running at 30 percent to 40 percent capacity.

Repsol is responsible for providing all of the LNG at Canaport and holding the capacity of the terminal. Irving Oil handles the marketing of the regassified liquefied natural gas in Atlantic Canada, while Repsol markets it elsewhere in Canada and in the United States. Canaport has a long-term contract to purchase LNG from Qatar.

Another Australia LNG projects gets the go-ahead

(Reuters; Jan. 13) - Japanese group Inpex and French oil group Total have given the go-ahead for a $34 billion LNG export project that will see Australia overtake Qatar by 2017 as the world's top LNG exporter. That cost estimate is up from the initial 2008 forecast of $20 billion. About 70 percent of Ichthys LNG will be shipped to Japan under long-term supply agreements. Some of the LNG also will go to Taiwan.

The green light for the project - with capacity to handle more than 1.1 billion cubic feet of gas per day and expected to produce 100,000 barrels a day of condensate - comes amid an LNG rush in Australia that will see its export capacity almost quadruple to more than 10 bcf a day by 2017 from about 2.7 bcf a day now. The go-ahead means Australia will have eight LNG projects under way. The project will pipe gas from the Timor Sea to a liquefaction plant at the coastal city of Darwin in Australia's Northern Territory.

Inpex holds a 72.805 percent stake in the project and Total has 24 percent. Tokyo Gas bought 1.575 percent this week, while Osaka Gas has 1.2 percent and Toho Gas 0.42 percent. First gas is expected in late 2016. The final investment decision means Total can book reserves of 720 million barrels of oil equivalent. This should mean it is able to report rising total reserves for 2011 - a key metric for oil companies.

China expects to produce almost 11 bcf of gas a day in 2012

(China Daily; Jan. 12) - China's output of natural gas is expected to increase by 11 percent in 2012 to reach almost 11 billion cubic feet per day, the China Petroleum and Chemical Industry Federation said Jan. 11.

The demand for natural gas will climb to an average 14.3 bcf a day, an increase of 15.3 percent from a year ago, the China Petroleum and Chemical Industry Federation said. LNG and pipeline imports will cover the 3.3 bcf/day shortfall between domestic production and demand. In 2010, China produced an average 9.36 bcf/day and consumed 10.54 bcf/day, for a gap of almost 1.2 bcf/day, according to the BP Statistical Review of World Energy June 2011.

Liu Tienan, director of the National Energy Administration, said at the National Energy Work Conference in Beijing Jan. 10 that China plans to establish a system to curb domestic energy use and that the country's ultimate goal is to reduce emissions. Liu also said investments in domestic natural gas production - unconventional gas in particular - are expected to increase greatly. 

Companies develop more effective fracking technologies

(Bloomberg; Jan. 11) - As regulators study whether hydraulic fracturing damages the environment, the industry is studying ways to create longer, deeper cracks in the earth to release more oil and natural gas. Energy companies are focused on boosting production and lowering costs associated with fracking - the more thoroughly the rock is cracked, the more oil and gas will flow from each well.

The world's largest service providers are leading the search for new technologies, with some focused on splintering the rock into a web of tiny fissures, and others seeking to create larger crevices in the richest zones. Baker Hughes has set its sights on "super cracks," a method of blasting deeper into rock to create wider channels to funnel more oil and gas. The aim for the technology - "DirectConnect" - is to concentrate fracking power to target oil or gas buried deep in the formation. The product is being field tested.

Schlumberger has developed its own version of a super-crack after six years of research. Called HiWay, it injects material to prop open wider pathways for oil and gas to flow. The number of companies using HiWay in North America has grown from two a year ago to more than 20, the company said in October. Schlumberger has said its HiWay technology provides environmental benefits by reducing water and sand use and the corresponding number of trucks delivering the materials.

Calgary firm experiments with fracking - without using water

(Dallas CBS TV; Jan. 12) - The debates for and against hydraulic fracturing all center on the world's most essential natural substance: water. Environmentalists decry the millions of gallons used each time to split open shale rock deep inside the earth. This is exacerbated, they say, as water becomes more of a commodity during the worst drought in Texas history. Residents and housing associations near drilling sites point to chemical additives in the fracking water.

The natural gas industry, however, rebuffs these complaints, citing a lack of evidence that links hydraulic fracturing with groundwater contamination. But it all goes back to the water: what's added to it, how much of it is used, where it comes from. Which raises a question:  What if energy companies could allay the concerns by using a completely different substance? What if it was possible to frack without water?

In 2008, Calgary-based GasFrac did just that; it used a thick propane gel in place of water. The method, called liquefied petroleum gas fracturing, pumps a mix of the gel and sand into shale rock. GasFrac says it has used the method 1,000 times in Canada since 2008, and in 2010 opened an office in Texas - though its process has been used just once in there. Emmett Capt, GasFrac's vice president of U.S. operations, said the process between $50,000 and $100,000 more than a well that is fractured with water.

Pipeline company appeals property value case
to Texas high court

(Wall Street Journal; Jan. 12) - Oil and natural gas pipeline companies are asking the Texas Supreme Court to overturn a ruling they say jeopardizes new projects. The industry says its costs are soaring as landowners, bolstered by a recent appellate court opinion, seek much higher payments for damage to their property values from pipelines and reject what they see as lowball offers from companies.

Under Texas law, companies can build pipelines across private property over landowners' objections, but must pay for use of the land and any damage to the value of the rest of the property. A year ago, an appellate court in San Antonio upheld a jury verdict against LaSalle Pipeline that awarded $600,000 to the Donnell family of McMullen County, Texas. The award was mostly for the loss of value to an 8,000-acre ranch after LaSalle built a gas pipeline that stretched for four miles across the property.

LaSalle has appealed to the Texas Supreme Court, which has asked for briefs but not yet agreed to hear the case. LaSalle didn't dispute that it should pay for the rights to the 17 affected acres, but it said the pipeline didn't diminish the value of the overall property at all. The Houston-based company argued that the landowner's appraiser failed to consider factors besides a pipeline that could affect what people would pay for it, including location, shape and access to water.

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