Global (but Regional) Natural Gas and the Gas-Coal Paradox
From recent conversations with leading onshore oil/gas producers, it seems that there is almost no US shale (with favorable seismic data) that cannot be frack-ed to produce hydrocarbons. It’s just a matter of time until, in the face of a mature services, pipeline, and processing infrastructure, a determined operator can pulverize the tightest rock into submission. Hence, the real possibility of $4-6 (per mcf) natural gas for years. However, deeper shales away from infrastructure (services and pipes) and water, will require more investment, technology, and time. This is largely the case with European, African, and Asian rocks, and should help preserve some form of price linkage to oil, especially in Asia. Relatively new options to supply natural gas to Asian markets comes in the form of LNG exports from either the US or, much more likely, Western Canada. Apache and EOG are participating in a partly permitted pipeline from Alberta to Kitimat, BC, for liquefaction and likely sale into Japan and Korea on oil-linked bases. Now Shell is examining a second pipeline/liquefaction project from a nearby port, and Cheniere, having failed in their bet to import LNG to the US Gulf Coast, is working to liquefy and export from its existing regasification sites. These schemes will probably compete with other higher cost suppliers into the Pacific Rim market – coal seam gas producers in Australia (four projects in planning stages). In recent months, the Western Canada option appears to have slowed buyer interest in three of the coal seam methane (CSM) concepts (BG’s is the only one with contracts in hand), threatening their viability. It appears that Asian customers need the gas by 2015 – growth in China and Korea, and maturing contracts (with falling supplies) into Japan. It’s also clear that, while LNG exports from the US Gulf Coast MIGHT work into Latin America or even Europe, they are unlikely to compete with shorter haul supply lines into (higher paying) Asian markets. Good Luck to Cheniere.
Meanwhile, a very wet Australian ‘summer’ has restricted both metallurgical and thermal (power) coal exports, pulling product out of an export-constrained Eastern US. As coal loses share to cheap cheap US natural gas, shippable product is in great demand by other markets. For perhaps the first time in history, gas on gas competition is a winter phenomenon, rather than just an aberration of the fall (neither air conditioning nor heat) power season.
So the conundrum is that, with coal and gas plentiful in the US, and expensive elsewhere, there is no easy way to arbitrage/substitute. Nor is there, apparently, any easy way to exploit the US oil/gas ratio — now round 20:1 against a theoretical 6:1 energy ratio. It will take years to build more gas fired power, and there are enough nagging (but addressable, in my view) problems to hinder the development of natural gas for mass transportation. I do expect more effort to alleviate those barriers this year, but everything seems to take more time than it could. While electrified transportation makes better sense, longer term, there is plenty of compressed natural gas (CNG) opportunity on a shorter time frame, given the will to do it. The best CNG model would seem to focus on smaller vehicles and return-to-base operations — taxis, delivery vehicles, garbage trucks, etc. A Brazilian agency, charged with reviewing the country’s stunningly large estimate of potential pre-salt resource base (viewed as too optimistic), has reported that the forecast may be too low – the 50-80 billion barrel resource in place could be over 200 billion! Awaiting further clarification and details, given the often promotional newsflow from the country’s energy ministry.