by Bob Shively, Enerdynamics President
Just three years ago, the overwhelming consensus was that U.S. and Canadian natural gas supplies were dwindling and growing demand would overwhelm supply, thus resulting in long-term high prices. Developers seeking to take advantage of the next big infrastructure boom rushed to get LNG import terminals in place in the U.S., Canada and northern Mexico.
Fast forward to 2011. The shale gas boom coupled with falling industrial demand during the great recession has turned the North American gas marketplace on its head. By the end of 2009, U.S. gas reserves had increased by 19% in two years. The December 2010 month-ahead Henry Hub price of $4.27/MMBtu was 67% lower than its 2008 summer peak of $13.11/MMBtu.
Compared to other global markets, natural gas in the U.S. is cheap – December 2010 LNG spot prices in Europe were about $9/MMBtu, and in Asia were more than $11/MMBtu. Suddenly gas producers in the U.S. see a new opportunity: Why not take some of the excess availability in the U.S. and export it to these higher priced markets?
Since 1969, the U.S. has exported small volumes of LNG to Japan (from the Alaskan Kenai facility) and volumes by pipeline to Mexico. Might the U.S. begin exporting more significant volumes to world markets? Current market activities suggest the answer is yes. A number of market players are moving forward with preliminary actions to develop such capabilities.
The Department of Energy has granted permits to multiple existing LNG terminals looking to re-export LNG volumes sitting in their storage tanks, and, in the past year, cargos have been re-exported from the U.S. to Europe and Asia. And a number of countries in the Caribbean and South America are interested in replacing more costly oil-fired electric generation with gas-fired generation fueled by LNG imports.
So what does this all mean? Not much in the immediate future as export infrastructure will take a number of years to develop. But, by 2015 or 2016 we could see North American natural gas supplies begin to compete in world markets. This might once again shift our paradigm of how natural gas is priced and how large the potential market is for North American production.