US natural gas producers may be seeing their dream of substantial liquefied natural gas (LNG) exports suffer fatal injury because of Russian exports to the Chinese market, Cobb writes, a market that was expected to be the largest and most profitable for LNG exporters.
By Kurt Cobb, Resource Insights NOVEMBER 19, 2014
Matt Houston/AP/FileView Caption
Russia and China have signed two large natural gas deals in the last six months as Russia turns its attention eastward in reaction to sanctions and souring relations with Europe, currently Russia’s largest energy export market.
But the move has implications beyond Europe. In the department of everything is connected, U.S. natural gas producers may be seeing their dream of substantial liquefied natural gas (LNG) exports suffer fatal injury because of Russian exports to the Chinese market, a market that was expected to be the largest and most profitable for LNG exporters. Petroleum geologist and consultant Art Berman–who has been consistently skeptical of the viability of U.S. LNG exports–communicated in an email that Russian supply will force the price of LNG delivered to Asia down to between $10 and $11, too low for American LNG exports to be profitable.
Now, let’s back up a little. U.S. natural gas producers have been trying to sell the story of an American energy renaissance based on growing domestically produced gas supplies from deep shale deposits–now being exploited through a new form of hydraulic fracturing called high-volume slick-water hydraulic fracturing.
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The problem has been that overproduction and low prices–now only a fraction of the $13 per thousand cubic feet (mcf) at the peak in 2008–have undermined the financial stability of the natural gas drillers. Here’s why: Natural gas from shale, referred to as shale gas, is generally more expensive to produce than conventional natural gas and will require that natural gas prices go much higher than they are today–from around $4 per mcf almost certainly to over $6 per mcf and perhaps more to pay the costs of bringing that gas out profitably.
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But at that price, U.S. LNG is no longer competitive in Europe. And now, because of the Russian-Chinese natural gas pipeline deals, it may no longer be competitive in Asia. Those are the two largest markets for LNG. Without them it is doubtful that the United States will be exporting much LNG–except perhaps at a loss.
Here’s the problem: To convert U.S. natural gas to liquefied natural gas, put it on specially built tankers and ship it to Europe or Asia will cost about $6 per mcf. If the price of U.S. natural gas averages around $6 per mcf, the total landed cost of U.S. LNG will be the cost of the gas plus the cost of converting it and shipping it, that is, around $12 per mcf.
The most recent landed prices for LNG to Asia as reported by the Federal Energy Regulatory Commission were $10.10 per MMBtu* for China, $10.50 for Korea and $10.50 for Japan. For Europe the numbers are even more sobering: $9.15 for Spain, $6.60 for the United Kingdom, and $6.78 for Belgium. All amounts are U.S. dollars.