The US is the world’s largest natural-gas producer, annually extracting almost as much gas as the Middle East and Africa combined. North America is essentially a self-contained market, with the US and Canada supplying enough gas to meet their domestic needs.
Just five years ago, conventional wisdom held that US gas production would continue to decline, even as demand for gas as a power plant fuel expanded. Meanwhile, Canadian output looked to be stagnant at best, and the oil-sands industry was consuming an ever-greater portion of domestic supply. Exports to the US were declining sharply.
In most projections, a big jump in liquefied natural gas (LNG) imports was expected to fill the gap.
LNG is nothing more than a super-cooled version of natural gas. When gas is cooled to around negative-260 degrees Fahrenheit, it condenses into a liquid.
Better still, as gas cools, it takes up less space; LNG takes up roughly 1/610 the volume of gas in its natural gaseous state. To put that into context, a beach ball-sized volume of gas shrinks to the size of a standard ping-pong ball when it’s converted to LNG.
LNG frees gas from the pipeline grid. If you’re able to turn natural gas into a liquid, it can be loaded onto tankers just like crude oil, and transported anywhere in the world.
The discovery and rapid development of North America’s vast unconventional shale fields, such as the Haynesville Shale of Louisiana and the Marcellus Shale in Appalachia, has changed the LNG equation for the domestic market. These fields have proven so prolific that the US faces a glut of gas. In fact, in some years America’s gas storage capacity has come close to being completely filled, forcing producers to shut in wells to reduce supply.
Shale has kept a lid on US gas prices—since early 2009, US gas futures have hovered around the $4 per million BTU level—and with domestic gas production still rising far faster than demand, there’s little scope for a sustained rally over the next few years.
The US has no real need to import LNG. In fact, the country is regarded as a market of last resort for LNG cargoes because North America has more capacity to store gas than most other gas-consuming regions of the world. In total, the US imports less than 10% of the gas it consumes, with virtually all of those imports coming from Canada.
There’s been considerable hype surrounding potential for North America to become a major LNG exporter. But the Kenai, Alaska LNG plant owned by ConocoPhillips (COP) and Marathon Oil Corp (MRO) has operated since 1969, and remains the sole US export terminal. And in February, the facility’s operator announced that the plant would be mothballed once its latest long-term contract expires.
Meanwhile, proposed new LNG export terminals in the Lower 48 are years away from becoming reality. In short, the US and Canada aren’t important players in the global LNG market. Rising natural gas prices in international markets have no bearing on North American markets.
International Growth
While LNG isn’t likely to be a major theme for the US over the next few years, there’s plenty of growth and considerable profit opportunity abroad.
Europe and most of Asia don’t have the advantage of vast shale production to meet domestic demand, and many are 100% dependent on natural-gas imports, either via pipeline or LNG.
In Germany and many other European countries, utilities sign long-term gas supply contracts with Gazprom for access to pipeline gas. These “take-or-pay” contracts feature prices indexed to crude oil.
By "take or pay," European utilities must accept delivery of a contracted volume of gas or pay a penalty. With European gas markets well supplied in recent years, these penalties have grown significantly.