Thursday, November 5, 2009

Availability and Profitability of Natural Gas and LNG

It is a little difficult to predict, just at the moment, which way the natural gas situation is going to swing over the next year. The number of different events that are contributing to the overall supply of natural gas seem, on the surface, to indicate that there will be more natural gas than is needed. But there is some question as to how much will actually appear, as the year develops.

For those who want everyone to believe that there is no longer a shortage of natural gas there are the additional LNG supplies that are now coming on stream. Just this week Yemen begins shipping its first cargo to Korea, with a second cargo from Belhaf soon to follow. The gas comes from a reservoir in the center of the country and had to travel some 320 km to the processing plant and terminal. The first train is committed to the Korean market. A second train is expected to be brought on line in a few months, to raise total production to some 6.7 million tons per year. While the market for this second stream was originally expected to be in the US, at present they are keeping it closer to home by intending to sell to India.

The USA had been seen as a sure market for LNG at the time that Belhaf was planned but that was before shale gas began to hit the scene. Now, the declining price in the American market, and the prevailing large quantities in storage, make that less desirable.

Moving around the coast to Qatar, business is good with three LNG vessels shuttling to the UK this month. With three LNG terminals – at Dragon, South Hook and Isle of Grain, the UK can now import up to 25% of its needs as LNG. That is helping to keep the price of natural gas lower in Western Europe and has a natural knock on to prices that those countries want to pay to such companies as Gazprom.

Qatar is simultaneously setting up to be a major supplier to China. The Chinese see that market being in the range of 40 to 60 million tons by 2020. They have just started taking delivery of an initial 2 million tons per year from Qatar.

Back in early 2006 when the expansion of LNG trains was planned for Qatar it was expected that the US would be buying up to 30% of its needs from Qatar and Qatargas Trains 3 and 4 each with a capacity of 7.8 million tons, were started on that assumption. Now, of course, with the increased domestic production from the shales there is no longer such a need and the question becomes one of working out where the new surplus of natural gas will go.

Part of this may go to Europe to replace the Turkmen gas that may not make its way West this year, since Turkmenistan and Russia (not to mention Russia and Ukraine) still seem to be at odds over the price and profit that they each might make from supplying gas West. Turkmenistan can now hold on, given that it is selling its natural gas to China, in almost the same quantities, but for a much better price. Russia is, however, starting to get natural gas from the new Achimov deposit. The declining market, due to the recession, has seen Gazprom sales fall, but they are now claiming some turn around in that situation. incidentally, those who wish to get some idea of why it might be hard to gain a good idea on Turkmen reserves and production should read Shaun Walkers story in The Independent.

Not that China is content to just rely on the new feed from Turkmenistan. It is also starting to import LNG from Malaysia through a new terminal at Shanghai, and will purchase the LNG from Qatar train 2. A third Chinese LNG terminal also began operation earlier this year.

Now that is all the good news about supply. The questions that remain relate to the production that can be anticipated from the gas shales in the United States. The problems of maintaining production from gas fields that can drop production by over 20% in a month, or 80% in a year are not yet recognized. One significant one, that Arthur Berman raised as a concern, is the ability of wells to attract enough investors to pay for sinking them. If the recovery rate from the wells requires a high price and sustained volume to attract those investors, then the availability of cheaper LNG from the Middle East may keep the price from reaching the levels that are needed. Another LNG terminal has just been approved for Port Dolphin in Florida, while there is growing support for a facility at Coos Bay in Oregon. But that is, in the short term, seeming to bring in natural gas into a country that already has enough. The EIA notes that the current price of natural gas (Henry Hub) is around $4.289/kcf - the threat of imports from abroad will likely keep it down at around that level this winter. The question then comes as to whether, at that price there is enough profit in the gas wells to continue drilling in the gas shales.

I suspect that the hype, for a short time, will keep that program running, but if you’re losing money on production you can’t make it up on volume. The rig count is slowly rising, but whether the resulting production will make money, and how long will the wells last are topics for another day. Though cold weather, short term, might help in reducing what continue to be record stocks of natural gas.

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