The rapid development of shale gas in the US in the past five years has pushed the domestic market price of gas below the cost of production, but this is unlikely to benefit Asia much, according to Fereidun Fesharaki, chairman of Facts Global Energy, a company providing research and analysis to the oil and gas industry.
Speaking at the Credit Suisse Asian Investment Conference in Hong Kong this week, Fesharaki noted that the fixed costs related to the export of liquid gases — transportation and liquefaction costs plus pipeline charges — are about $7 per million British thermal units (mBtu). And on top of that you have to pay the market price for the gas, which is currently about $3.50 per mBtu but is expected to rise to $5 to $6 in the future.
This puts the cost of acquiring shale gas from the US at about $12 to $13 per mBtu, which isn’t that different to the prices paid in Asia today. For instance, the average price for imported liquefied natural gas (LNG) in Japan is currently $14.50.
“Gas is cheaper in the US, but if you want cheap gas you will have to move to the US,” he said. “The lowest price gas landing in Asia will be at least $12 per million Btu, which is equal to $85 oil.”
And if you take into account the expectation that the long-term price of oil can drop to $80 to $85 per barrel (bbl) from 2015-16 onwards due to the increase in supplies, then the price difference of bringing gas from America or oil from Australia will be minimal.
Mathew Burrows, a councillor at the National Intelligence Council and the principal author of the NIC’s Global Trends 2030: Alternative Worlds report, noted in the same panel discussion that there are also internal hurdles in the US when it comes to exports of shale gas.
“On balance the likelihood is that exports from the US will happen, but you do have a lot of lobbying groups who are trying to prevent exports in order to keep prices very low in the US,” he said. “The US still has a very high unemployment rate and parts of the country are still suffering from the downturn, so it is a very attractive argument to keep the gas at home to keep prices very low and suck back manufacturing into the US.”
Also, while the export of natural gas is at the discretion of the department of energy, the potential export of oil out of the US would require a legislative act, which would make it much more difficult.
So far, one gas export project has been approved, according to Fesharaki and he said he expects another three to five projects to get approved as well, but not right away. “I had expected everything to be done this month or next month, but there is a huge political battle, as Matthew mentioned, and when you have a big battle the best thing is to do nothing. So, my expectation is that these projects may take a whole year from now to get approved.”
As it will be difficult for the US government to pick one project over another, Fesharaki said he expects the US government to open the door to everybody, but set high barriers and hope that they will restrict exports to two or three companies.
“Our expectation is that something like 40 to 60 tonnes of LNG will enter the Asian market, but I don’t expect, beyond the first project, that anything will get to Asia before 2020,” he said. “Exporting oil is a much tougher story, and the same people who are opposing exports of natural gas today will also oppose exports of oil. But eventually I see oil getting exported and the volumes can be very large.”
The International Energy Agency project that the US could export about 5 million bbl per day of liquids by 2020, which, according to Fesharaki will be bigger than Kuwait and the United Arab Emirates combined. “For the buyer this means a lot more supply, a lot more flexibility and a lot more choices, but not necessarily lower prices,” he said.
Fesharaki also disputed the talk that the US may be about to become self-sufficient in energy as a result of the development of shale gas and oil, arguing that the oil that is being extracted through the use of hydraulic fracturing (known as fracking) is too light to be used for refining on its own. It needs to be mixed with heavier grades to provide feedstock for the refineries.
These heavier grades come either from Canada, in the form of oil sands, or from the Middle East, Venezuela or Mexico. Canadian oil sands are currently being imported into the US in small doses, but President Obama is about to make a decision on whether to approve the Keystone-Exxon pipeline that could bring in larger volumes.
“The US badly needs this,” Fesharaki said. “Unfortunately, my understanding is that [President Obama] is likely to say no, pushed very heavily by anti-carbon environmental groups within the Democratic party.”
At the same time, he added, Mexico’s oil production is in decline for a variety of reasons, including a long history of mismanagement and lack of investment, while Venezuela has been selling oil primarily to India and China as a way for recently deceased President Hugo Chavez to punish the US. Which leaves the Middle East.
“It is totally counter intuitive, but while the US consumption of oil is declining and the total US imports of oil are 1.5 million bbl/day lower than they were two to three years ago, the volume imported from the Middle East is actually rising in order to provide the heavier grades needed to blend with the lighter grades,” Fesharaki told a packed room at the AIC conference.
“If Obama doesn’t approve the Keystone-Exxon pipeline, and if the passing away of Chavez does not significantly change Venezuela’s policies, it will mean more Middle Eastern crude coming into the US.”
So far, the largest impact on suppliers from the shale oil and gas boom has been in North Africa, where export volumes to the US have dropped radically. But the Saudis are actually exporting more to the US now than before the shale gas revolution, Fesharaki said.
Neither of the two panellists expects the debate about the environmental impact of fracking to lead to a widespread ban.
“It is too late to stop it,” Fesharaki said. “It’s already a force of its own. We are looking at 2 million to 4 million jobs and trillions of dollars of income. The future of the US economy and its energy security depends on this.”
It is quite possible, however, for legal cases to be brought against gas drillers and for this to delay or slow down production, particularly if there is some sort of accident or pollution of an aquifer, Burrows said.
The key is for the producers to “spend the money to make sure environmental problems don’t arise”, added Fesharaki. “So far, it seems that people are operating with prudence.”
With regard to the development of shale gas in China, this is much longer term story, Fesharaki said. The country does have greater reserves than the US, but lacks major pipelines for transportation and also has to bring in the water needed in the fracking process by pipeline or truck, which is both expensive and problematic.
“It is nothing that the Chinese government should oppose…but realistically I don’t see much change in the next 10 to 15 years. China will continue to import LNG and will continue to go outside seeking assets. Buying equity is glory, spending money in China and getting the farmers upset at you is no glory — so from the point of view of the major Chinese oil companies, there is no rush.”
