Shale gas – make hay while the sun shines

Love it, hate it or simply got to have it to power the nation, shale gas and the apparent abundance of it continues to change the global energy game and there is little telling where it will stop. There are genuine environmental concerns, often about water contamination and even worries that practices associated with the horizontal fracturing process to recover the gas from shale formations, known as fracking, may set off seismic activity. The US in particular has charged headlong into shale gas and as a result, natural gas prices both in the US and Canada are depressed, ironically at a time, when in many other places in the world natural gas prices are healthy and could go higher.

It is all about getting the resource to the right market. Right now, the US and Canada has the right resource in the wrong market. It is little surprise then that a deal between Cheniere Energy Partners’ subsidiary, Sabine Pass Liquefaction and BG Gulf Coast LNG, a subsidiary of BG Group, has the green light. Under the terms of the agreement, BG has agreed to purchase 3.5Mta for 20 years of LNG, which could quite feasibly be destined for Asian markets.

Sabine Liquefaction, in its first phase of its facility at the Sabine Pass Terminal, owned by Cheniere Partners, says that it is planning to develop the ability to produce 9Mta. In May 2011, Sabine Liquefaction received authorisation from the US Department of Energy (DOE) to export up to 16Mta of LNG to all countries where trade with the US is permissible. “BG is one of the largest participants in the global LNG markets and will be a strong foundation customer for our Sabine Pass liquefaction project,” said Cheniere’s Chairman and CEO, Charif Souki, in a statement. “Entering into this agreement is a significant milestone for our project and we look forward to finalising additional commercial agreements and proceeding with the development of the first two trains.”

With BG being a UK-based company it is highly likely that the US will become a new source of supply for the UK too. Exports are expected to commence in 2015 while the Cheniere/BG deal has been estimated at being worth around US$8bn.

Economic possibilities
The Sabine Pass liquefaction project is ideally placed to get its natural gas supplies from the nearby Haynesville Shale formations in northwest Louisiana and East Texas. And, while it is early days to come up with any hard numbers, business leaders and politicians are getting excited about the economic possibilities. “While the most direct, initial benefits of this partnership will be present in the numbers of jobs created in South Louisiana, this project is important to this area in that it keeps the investment cycle moving. I believe that this speaks to the strength of the Haynesville Shale and the volume of natural gas that is being produced here,” Jodee Bruyninckx, Louisiana Oil and Gas Association’s North Louisiana director told the Shreveport Times. “This area will see the indirect benefits from this project as it provides a broader market, an international one, for the fruits of the Haynesville production. Companies have shown a commitment doing business in the state of Louisiana, and this project is a continuation of that commitment.” While state Department of Natural Resources Secretary, Scott Angelle told the Shreveport Times that the LNG export permit was, “Incredible news for Louisiana. The Sabine Pass LNG export facility has opened Louisiana’s energy industry to new markets and new consumers, and this first agreement solidifies the opportunities for new exploration and jobs in both the energy industry and support industries all across the state.”

If the balance between domestic need and export sustainable availability can be managed then the US and Canada, when its BC LNG export terminals are ready, have a great opportunity. With alternative markets ready and willing to pay more, than perhaps an oversupplied resource can return to a viable and fair price for all, allowing jobs and economic activity to grow. With a US federal election in 2012 it is unlikely that the Obama administration will set up many road blocks.

China’s potential
Often when Asian markets are mentioned it is the economic powerhouse of China that comes to mind first, closely followed by India. Indeed, a recent Reuters report quoted Philip Olivier, president of GDF Suez’s LNG unit has saying that the People’s Republic of China’s demand for LNG is expected to grow to 44Mta by 2020. The nation reportedly imported 9.4Mt of LNG in 2010. While it is quite possible that China’s demand for LNG may indeed hit those levels one may also reasonably ask why it would want or need to, or at least for very long. According to the US National Energy Administration (NEA), China currently has more shale gas reserves than any other nation in the world with 1300tnft3 – the US is second with 862tnft3.

However, China’s shale gas industry is its infancy and it either is not producing very much shale gas or possibly none at all. Nevertheless, the potential is there for China to be the world’s number one producer once it has a handle on the technology and the infrastructure is built. The technology can be developed and/or acquired through the purchase of foreign companies, a practice that China’s energy companies have been carrying on for some time, while the infrastructure will take time but there will doubtless be plenty of takers for construction contracts. Also, in terms of traditional opposition to shale gas drilling that has been experienced in the west, China is probably not likely to hold back much, if it affects the long-term goal.

Yes, right now and probably for the next decade or so, China will require LNG. But much beyond that if the country gets its shale gas industry going it is possibly more likely that it could be Chinese LNG exports from its shale gas industries competing with the very companies that used to supply it. The phrase, “make hay while the sun shines,” springs to mind.