Exporting Natural Gas from America

We don’t have the natural gas to export as you can see in Shale Oil and Gas Will Not Save Us.

Nonetheless, it looks like we may be exporting it.

Matt Simmons, a financier of very large energy projects thinks that LNG is a good way to go bankrupt. He said that “The cost to produce and distribute LNG is so high that to make LNG work in any sort of financial reality, you would need a 25- or 30-year guaranteed supply. And then you can amortize it over 25 or 30 years. If you’re going on a spot supply, you’ve got to write it off over 10 years and then you’ll need $40 per million BTU to make the economics work. The other thing is that about 35% of the hydrocarbon value gets chewed up in the process of cryogenically freezing natural gas, transporting it, and then re-gassing it.”

Ugo Bardi writes in his book “How the Quest for Mineral Wealth Is Plundering the Planet” The problem is that storing natural gas requires heavy, expensive pressurized vessels, and transporting it requires complex and expensive infrastructure. On land gas is transported through a network of pipelines. To travel by sea, gas must undergo cryogenic liquefaction to obtain a sufficiently high-energy-density liquid (liquefied natural gas, or LNG) for transportation in special refrigerated tankers. These methods are far from being satisfactory: pipelines cannot cross oceans, and cryogenic transportation is expensive. So gas remains mainly a regional resource, and it makes little sense to speak of a global production peak for gas in the same way we would for oil.

De Aenlle, C. Oct 7, 2014. One key to exports: Liquid Gas. New York Times.

The Energy Department forecasts shipments abroad of liquefied natural gas equivalent to two trillion cubic feet by 2020, roughly 7 percent of expected domestic production.

There are various benefits to shrinking gas in an expansive way. One refrigeration unit, called a train, costs $2 billion or more. But as a plant installs more trains (so called because they are narrow and tend to be arranged sequentially), they become cheaper because the high cost of planning, engineering and construction is spread out over more units, and supplies can be sourced cheaper in larger quantities. The cost to build other parts of liquefaction facilities — storage tanks, jetties where ships are loaded, the initial planning, site preparation and so forth — is also spread out.

The compressors that liquefy gas run on gas themselves. A decade ago, about 70 percent of the energy used in the process was lost through heat dissipating into the air, now it’s about 60%.

Cobb, Kurt. Apr 15 2012 by Resource Insights, The dumbest guys in the room: Is Cheniere Energy a contrarian indicator for natural gas? 

The 100-year claim of natural gas supplies derives from an industry estimate of total resources, a significant portion of which will never turn into actual reserves. There is no evidence to suggest that all these resources will be both technically recoverable and economically profitable.

Proven U.S. reserves amount to only 11.5 years of consumption at 2010 rates. If we include proven and probable reserves, the number is 22 years, hardly a figure that inspires confidence that there will be adequate supplies available for export in the coming decades. In the same linked piece author Art Berman, a petroleum geologist and consultant who has carefully studied the state data for U.S. natural gas production, concludes that all major natural gas producing areas except Louisiana appear to be peaking in their rate of production. These include “Texas, Louisiana, Wyoming, Oklahoma, Gulf of Mexico Outer Continental Shelf, and New Mexico [which] account for roughly 75% of U.S. natural gas supply and, therefore, provide a useful proxy for total U.S gas production.”

It is worth quoting Berman at length to get the flavor of his analysis:

For several years, we have been asked to believe that less is more, that more oil and gas can be produced from shale than was produced from better reservoirs over the past century. We have been told more recently that the U.S. has enough natural gas to last for 100 years. We have been presented with an improbable business model that has no barriers to entry except access to capital, that provides a source of cheap and abundant gas, and that somehow also allows for great profit. Despite three decades of experience with tight sandstone and coal-bed methane production that yielded low-margin returns and less supply than originally advertised, we are expected to believe that poorer-quality shale reservoirs will somehow provide superior returns and make the U.S. energy independent. Shale gas advocates point to the large volumes of produced gas and the participation of major oil companies in the plays as indications of success. But advocates rarely address details about profitability and they never mention failed wells.

Shale gas plays are an important and permanent part of our energy future. We need the gas because there are fewer remaining plays in the U.S. that have the potential to meet demand. A careful review of the facts, however, casts doubt on the extent to which shale plays can meet supply expectations except at much higher prices.

The entire piece should be required reading for anyone involved in energy policy or who is thinking about investing in anything related to natural gas. The upshot for investors is that natural gas prices are likely to recover much sooner than most analysts are predicting. Gas rig counts in North America tumbled from 906 during the first week of November to 624 last week. This is the lowest number of gas rigs deployed since 2002. As the count continues to fall, new production capacity will slip in the face of a 32 percent annual production decline rate. That’s not a typo.

The U.S. must now replace one-third of its natural gas production capacity each year just to stay even. Shale gas wells contribute to much of the problem with a first-year decline averaging 65 percent and a two-year decline rate around 80 percent.

The rotary drills will only return to the shale gas fields when prices reach levels that are actually profitable which Berman estimates to be at least $4 per mcf for existing plays and up to $9 per mcf for some new ones. What this implies is much slower growth in supplies, something anticipated by the U.S. Energy Information Administration in its 2012 Annual Energy Outlook which projects that natural gas production will rise from 24.2 trillion cubic feet (tcf) in 2011 to 27.7 tcf in 2035, hardly a bonanza. Still, the EIA buys into the idea that the United States will become a net exporter of gas in 2021.

But Berman is skeptical believing that shale gas supplies will prove so challenging to extract that the country will find itself importing natural gas for a long time to come. If that’s so, then we can look at Cheniere’s decision to build natural gas export terminals as the perfect contrarian sign that U.S. natural gas prices are nearing their lows and will rise in the years to come.

The U.S. Congress and federal regulators may yet rue the day that they approved natural gas export terminals. Since such terminals typically enter into multi-decade contracts to ensure that they can recoup their costs, natural gas may be going out of the country just when domestic supplies are needed the most.

Cheniere expects its liquefaction plant, which liquefies natural gas by cooling it to -260 degrees F, to start operating in 2015. If that year marks the beginning of a sustained climb in U.S. natural gas prices brought on by increasing strains on domestic supplies, Cheniere will retain its usefulness as a contrary indicator. Increasingly expensive domestic gas may then result in small profit margins or even losses for exporters such as Cheniere. Between now and then, however, the hype surrounding U.S. natural gas supplies and LNG exports may help enrich a few Cheniere investors who are savvy enough to cash out before reality catches up with the company’s stock price.


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