Shale exploration technologies have initiated a renaissance for domestic applications for natural gas in shale fields such as the Eagle Ford that include power generation, manufacturing and vehicle fuel, but also the growing prospect for export.
At present, global natural gas markets are not integrated. Prices vary from $0.75 per thousand cubic feet in Saudi Arabia, to $3-$4 in the U.S. to around $12 in Europe and as high as $16-$17 in Japan. This situation is based on short-term shifts in supply and demand, which will start to change over the next few years.
In order to ship natural gas abroad from the U.S. efficiently, it must be super-cooled to minus 260 degrees Fahrenheit near an export terminal at a deepwater port and transformed into liquid natural gas (LNG), which reduces its volume by more than 600 times. An LNG tanker then transports the product to its designated foreign market. When the LNG reaches its destination, it is re-gasified back into a gas before being shipped to its final destination by pipeline. Each step in this process is significant in terms of operating costs.
For example, given the current worldwide price differentials, it is profitable to ship LNG to Japan from the United States. Assuming a U.S. market price of $4 per thousand cubic feet, there is the additional cost of approximately $6.40 to liquefy, transport and re-gasify at the delivery point in Japan – more than doubling the price. Even so, a healthy profit of $6.60 for every thousand cubic feet is still generated.
However, this lucrative opportunity will not go unnoticed by Australian, East African and even Canadian natural gas suppliers – all of whom have substantial natural gas reserves. Similarly, prices in Europe have remained artificially high because of Russia’s Gazprom monopoly on natural gas exports. With the threat of LNG imports from the United States, the Ukraine and other countries, prices in Europe are unlikely to remain at current levels either.
In short, markets are dynamic. While there is an attractive export opportunity in the near term (3-5 years) for U.S. producers, over the longer term supply will catch up with demand and reduce global price differentials. In the same way that crude oil has become a global market, so will natural gas. This will come about as a direct result of new, significant natural gas discoveries and eventual production in the U.S., Australia, East Africa and China.
Taken as a whole, these new supply markets that extend well beyond U.S. borders will serve to keep a cap on natural gas prices at an estimated $4-$7 per thousand cubic feet (and arguably in a tighter range between $5-$6). This kind of price stability will be a significant change from the frequent spikes that occurred during the era of conventional natural gas exploration and production. That’s because we have entered the unconventional production era.
The development of shale gas reserves on a global basis represents a paradigm shift in the way natural gas markets operate. If this is indeed the case, simple extrapolations from the recent past – when natural prices in fact fluctuated wildly between 2000 and 2010 – will be poor predictors of the future.
Natural gas production in the Eagle Ford Shale area, for example, has flattened out at roughly 2012 output levels (a little over 2 billion cubic feet per day), meaning that there has been essentially no increase in year-over-year production. Gas production in the Barnett and Haynesville shale fields is similarly muted.
Natural gas export, in addition to domestic uses in power generation, manufacturing and as a vehicle fuel will help bring U.S. and global prices into greater equilibrium. Evidence strongly suggests that limiting exports will simply limit supply.
THOMAS TUNSTALL, Ph.D., is research director for the Institute for Economic Development at the University of Texas at San Antonio.