The US Energy Department prepares a wave of LNG gas permits in the latest move
to redraw the world's oil and gas landscape
The United States is poised to flood world
markets with once-unthinkable quantities of liquefied natural gas as
soon as this year, profoundly changing the geo-politics of global energy
and posing a major threat to Russian gas dominance in Europe.
"We anticipate becoming big players, and I think we'll have a big
impact," said the Ernest Moniz, the US Energy Secretary. "We're going to
influence the whole global LNG market."
Mr Moniz said four LNG export terminals are under construction and the
first wave of shipments may begin before the end of this year or in
early 2016 at the latest.
“Certainly in this decade, there’s a good chance that we will be LNG
exporters on the scale of Qatar, which is today’s largest LNG exporter,”
he said, speaking on the margins of the IHS CERAWeek energy summit in
Texas.
Qatar exports just over 100
billion cubic meters (BCM), though Australia is catching up fast as the
offshore Gorgon field comes on stream. It may pull ahead of Qatar later
this decade.
Mr Moniz said the surge in
US output from shale fracking has already transformed the global market.
"We would have been importing a lot of LNG by now. Those cargoes would
have gone elsewhere and have in fact had a significant impact in the
European market,” he said.
Gas frackers assembled at the world's
"energy Davos" in Houston said exports could ultimately be much higher,
potentially overtaking Russia as the world's biggest supplier of
natural gas of all kinds.
"We're just fifteen years into a
150-year process," said Steve Mueller, head of Southwestern Energy, the
fourth biggest producer of gas in the US .
The mile-deep Marcellus basin stretching from West Virginia through
Pennsylvania to New York state is driving the explosive growth.
Interlocking fractures in the rock make it possible for a single well
with advanced technology to extract much more gas than thought possible
just five years ago.
Once thought to be in decline, the
Marcellus alone produces 113 BCM a year. This is roughly equivalent to
Russia's exports to Europe through the Nord Stream, Yamal, and
Brotherhood pipelines.
Mr Mueller defiantly sweeps aside those
who claim that the US fracking industry is in serious trouble, insisting
that drilling costs are coming down so fast that his company - and
others - are staying a step ahead of falling prices.
"Rig
efficiency was flat for thirty years but since then we've cut by five
times. We have set in motion something that you can't deny and is
irresistible," he said.
Mr Mueller said it had taken his company 17 days to drill a 2,600 ft
well as recently as 2007. It has just drilled a 5,400 ft well in six
days. "The new technology is amazing. We have a drill-bit with a chip
inside that makes its own changes," he said.
He is continuing to
invest heavily and hopes to boost output by up to 10pc annually for the
next three years, despite a drop in gas prices to around $2.60 per
million British thermal units (BTU). "If it stays around $3, we'll be
fine," he said.
The US
Energy Information Administration (EIA) expects gas prices to rise to $4.88 in real terms by 2020, and $7.85 by 2040.
What is remarkable is that US drillers can produce a third more natural
gas today with 280 rigs than they did in 2009 with 1,200 rigs. Total
shale output has soared to over 350 BCM from almost nothing a decade
ago. It now makes up half of US gas production.
The Obama
administration has so far been slow to approve new export terminals for
LNG, partly because of concerns that the US would lose its massive
advantage in energy and feedstock costs for industry.
Gas sells
at for $7 in Europe, and over $10 in North-East Asia, four times more
expensive. This cost-gap has been a key driver behind America's
so-called "manufacturing renaissance", stoking an investment boom in
chemicals, plastics, and glass, and saving the country's steel mills
from slow death.
A corridor from Houston to New Orleans has attracted 33 petrochemical
plants worth over $1bn each since 2011. The American Chemistry Council
expects over $130 billion of industrial projects along this stretch by
2023.
The administration has concluded that the US lead is now
so entrenched that there is little to lose from a partial levelling of
the global playing field. The expense of freezing gas for liquefaction
to minus 260 degrees Fahrenheit and shipping it across the Atlantic or
Pacific in molybdenum-hulled vessels is enough to maintain a big cost
advantage for US manufacturers.
Four LNG terminals with a
combined export capacity of 70 BCM are likely to be approved soon by the
Energy Department. The front-runner is Cherniere's $18bn terminal at
Sabine Pass in Louisiana.
Experts are split over whether North America really can become the
world's dominant LNG player. Moody's warned earlier this month that most
of the 30 gas liquefaction projects planned in the US and Canada will
never get off the ground, chiefly due to the linkage between LNG
contracts and the price of crude. "The drop in international oil prices
has wiped out the price advantage US LNG projects," it said.
Michael Smith, head of Freeport LNG, said his company will press ahead
regardless with plans for a $13bn plant near Houston, and predicted that
the US could soon leap-frog all rivals to become the new gas hegemon.
"Our projects are very competitive and we will continue to have an
advantage over the rest of the world," he said.
Russian
president Vladimir Putin warned at the St Petersburg economic summit
last year that US shale gas was abruptly changing the international
order, with serious implications for his country. The early effects have
forced down global LNG prices, creating a rival source of gas supply in
Europe.
Any future American cargoes would further erode
Gazprom's pricing power in Europe, and erode the Kremlin's political
leverage. The EU already has a large network of import terminals for
LNG.
Lithuania has just finished its "Independence" terminal,
opening up the Baltic states to LNG. Poland's new terminal should be
ready this year.
America's parallel drive for shale oil is
equally breath-taking. Scott Sheffield, head of Pioneer Natural
Resources, said his company has discovered huge reserves in the vast
Permian Basin of West Texas.
"We think the Permian could produce
5-6m barrels a day (b/d) in the long-term," he said. It is a staggering
claim. This would be more than Saudi Arabia's giant Ghawar field, the
biggest in the world.
Ryan Lance, head of ConocoPhillips, said
North American oil output could reach 15m b/d by 2020 and 25m b/d over
the next quarter century, three times Saudi Arabia's current exports.
A vault forward on this scale would establish the US as the leading
energy superpower in both oil and gas, a revival that almost nobody
could have imagined seven years ago when the United States was in near
panic over its exorbitant dependency of imported fuel. It would restore
the US to its mid-20th Century position as a surplus trading nation, and
perhaps ultimately as world's biggest external creditor once again.
Fracking is still an almost exclusive preserve of North America, and is
likely to remain so into the early 2020s. China has large ambitions but
the volumes are still tiny, and there is a shortage of water in key
areas. Fracking remains mere talk in most other regions of the world.
Lukoil analysts say Russian extraction costs for shale are four times
higher that those of US wildcat drillers. Sanctions currently prevent
the Russians importing the know-how and technology to tap its vast
Bazhenov basin at a viable cost.
John Hess, the founder of Hess
Corporation, said it takes a unique confluence of circumstances to pull
off a fracking revolution: landowner rights over sub-soil minerals, a
pipeline infrastructure, the right taxes and regulations, and good rock.
“We haven’t seen those stars align yet,” he said.
Above all it
requires the acquiescence of the people. "It takes a thousand trucks
going in and out to launch a (drilling) spud. Not every neighbourhood
wants that," he said.
Certainly not in Sussex, Burgundy, or Bavaria.