Companies race to take advantage of LNG boom

By Steve Wilson | Mississippi Watchdog

Companies, start your investments.

An energy boom might be headed for the Gulf Coast region thanks to increased demand in Asia for liquified natural gas. Already, the permitting process is filled with companies eager to reconfigure older facilities for LNG exports, with several of them on the Gulf Coast.

Houston-based Cheniere Energy is nearing completion of a $12-billion export facility on the Louisiana side of Sabine Lake, near Port Arthur, Texas, which is expected to begin exporting LNG in 2015.

Sempra International received a permit from the Federal Energy Regulatory Commission earlier this month to expand its LNG terminal in Hackberry, La. for exports.

Kinder-Morgan has long-term plans to convert its existing import facility in Pascagoula, Miss., at the Bayou Cassotte Industrial Park into an export facility.

The company has received clearance from the U.S. Department of Energy to export to Free Trade Agreement countries — South Korea, Colombia, Israel, Mexico and Costa Rica, among others — and is awaiting clearance to provide gas for non-FTA nations.

Richard Wheatley, Kinder-Morgan’s director of communications and public affairs, said the company is “moving forward with soliciting customer interest, assessing market interest for exports and awaiting non-FTA approval.”

“Anything else would be speculative at this point,” Wheatley said.

The company’s Elba Island facility near Savannah, Ga., already has received approval for export operations to FTA and non-FTA countries, he said.

It’s a race to see which company can get into the LNG export business first, and the consequences for being late to the checkered flag will hit hard in the pocketbook.

“We are seeing exactly what we should expect,” Rice University economist Kenneth B. Medlock, the senior director for the Center for Energy Studies at the James A. Baker III Institute for Public Policy, said in an email. “Very large rents in the near term stimulate an investment response. However, each firm is acting in a competitive marketplace, meaning they are not coordinating their response. This can lead to a short term overbuild.”

Medlock’s report on future LNG prices in the Asian market warns of a point where the returns on LNG exports won’t be as lucrative. Using the Rice University World Gas Price Model developed by Medlock and two other researchers, the forecast for demand in the Asian markets is bullish in the short term, but will lessen as more supplies reach the marketplace.

“This is not unique to LNG,” Medlock said. “ It is generally true of any large fixed-cost venture, or where economists would characterize entry costs as ‘lumpy … ‘ Effectively, large near-term rent signals an opportunity to add large chunks of new capacity to supply the market. However, many firms are acting the capture the opportunity, which ultimately leads to an overshoot.”

Even if only a few of these plans come to fruition, there still will be a massive influx of new, temporary construction and permanent jobs to the Gulf Coast region.

“I think all of this growth is going to lead for good times for the U.S. Gulf Coast,” said Stephen Schork, an energy analyst, trader and editor of the The Schork Report, a newsletter dedicated to the energy industry. “The rise in overseas natural gas prices bodes well for natural gas producers. There’s a big supply in the U.S. that’s going to be looking for other markets”

The biggest potential customer for U.S. LNG exports is Asia, specifically hydrocarbon-poor Japan and South Korea. After the Fukushima nuclear meltdown in 2011, the price for LNG skyrocketed as Japan shut down most of its reactors in the wake of the disaster. While the Japanese will be bringing some of those shuttered reactors back on line, LNG will meet more of the nation’s need for energy, measured in British thermal units.

The coming LNG boom is powered by the difference in prices between the U.S. and Asian markets. Cheap natural gas in the U.S., which bottomed out at a low of $2 per millions of British thermal units in 2012, has rebounded to a five-year high of $6.14 per 1 million Btu this month. In comparison, the Platts’s LNG benchmark price for March, the Japan Korea Marker, soared to a five-year high of $20.13 per 1 million Btu.

Schork said he doesn’t see the price dropping any lower than $3 per 1 million Btu for the forseeable future.

The primary driver behind the increasing U.S. supply is the massive rise in production of natural gas in the U.S., driven by hydraulic fracturing and horizontal drilling techniques that have made exploiting shale gas deposits – such as the Barnett Shale in Texas, the Marcellus Shale in New York, Pennsylvania, Ohio and West Virginia and the Haynesville Shale in Arkansas, Lousiana and eastern Texas – profitable. Since reaching a low of 18.9 million cubic feet in 2005, natural gas production, according to the U.S. Energy Information Administration, has risen steadily to an all-time high of 25.3 million cubic feet in 2012.

In the early 2000s, the U.S. was predicted to be an importer of natural gas, but the new supply rendered a glut of import facilities. Schork said the moves by energy companies are not surprising.

“This conversion to exports allows them to recoup their errant investments in LNG and turn those investments around,” Schork said.

While production of dry natural gas has slackened, the production of its compressed and liquid forms have taken a much greater share of the production pie.

LNG is the only method by which gas can be exported internationally on specialized tankers. It takes up one-six-hundredth of the volume versus its gaseous state, and is cooled to 265 degrees below zero Fahrenheit, requiring specialized equipment and nickel-lined tanks to prevent rupture.

ON GUARD: The Coast Guard provides a security zone for a shipment of liquefied natural gas in Cove Point, Md.

The U.S. isn’t the only player in the LNG game.

Several countries, including Australia, China and Russia, are building LNG export terminals to take advantage of new natural gas plays and satisfy growing demand from Asia.

Schork said one player already ahead of the U.S. is Qatar, which has five modern export facilities already satisfying demand to Asia and other markets.

Renewable energy even comes into play in the LNG export phenomena. When Schork reads about the so-called momentum towards renewable sources, he said he does so with a healthy dose of skepticism.

“When I hear the term renewable energy, all that is to me is a euphemism for greater demand for natural gas,” Schork said. “When there are hot days, it’s because the wind is not blowing. When the photons from the sun don’t reach the Earth, you’re going to have more natural gas demand. Something has to fill the gap in BTUs.”

Contact Steve Wilson at swilson@watchdog.org

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