Shale gas opens door to U.S. LNG exports

Energy companies step up effort to ship surplus gas overseas

By Steve Gelsi, MarketWatch

An earlier version of this story contained incorrect information about U.S. liquid natural gas facilities and the process for exporting LNG. The story has been corrected.

NEW YORK (MarketWatch) — A decade ago, a global glut of clean, cheap natural gas bred big plans to import liquefied natural gas to the energy-hungry United States.

That’s all changed.

Nowadays, energy companies are tapping into previously untouched North American gas reserves, prompting them to take a hard look at ways to sell their new-found gas to the rest of the world.

This sudden shift from gas importer to possible exporter is the result of innovative drilling technology that frees gas trapped in vast shale rock formations that until recently had been dismissed as non-commercial.

For the U.S. to become a serious natural gas exporter requires building a costly infrastructure, which will only happen if the right market conditions exist in coming years. Read about the booming U.S. shale gas sector.

Nevertheless, several companies already have plans to build liquefied natural gas, or LNG, export terminals while others are well into the evaluation process, raising the prospects of a billion-dollar construction boom for these highly specialized facilities.

Gas is typically shipped via pipeline, which is impractical for reaching markets outside North America. To overcome the transport obstacle, LNG terminals super-chill gas to its liquid form and load it into specially designed tankers for shipment overseas.

Once at its destination, LNG must be re-gasified before it can be fed into pipelines for local distribution, another costly facility.

Overseas natural gas prices offer bounty for U.S. suppliers.

Dominion Resources Inc. D -0.36% , and Cheniere Energy Inc. LNG -1.01%  have plans to build LNG export terminals alongside their existing import terminals.

A third terminal, Freeport LNG in Freeport, Texas, which is partly owned by ConocoPhillips COP +0.37% , is moving in the same direction, while Sempra Energy SRE +0.74%  has filed for a permit to export LNG from its Cameron LNG facility in Louisiana.

In Canada, Apache Corp. APA -0.45% , Encana Corp. ECA +1.44%  and EOG Resources EOG -0.44%   plan to join forces to build an LNG export facility in Kitimat, British Columbia.

Exxon Mobil Corp. XOM -0.68% , which already runs a global LNG business, is weighing the market to see whether initiating LNG exports from North America now makes sense.

Hyundai Heavy Industries

LNG carrier.

Sempra LNG

LNG cargo ship at Sempra terminal.

“We’re seeing a lot of industry thinking going on about that right now,” Exxon Mobil Senior Vice President Andy Swiger said at a recent energy conference, when asked about LNG exports.

“In terms of exports from North America, whether it’s the Gulf coast, or whether it’s Western Canada, it’s something we’re actively looking at,” he said.

The United States currently has several LNG receiving and storage facilities. Except for a single, 40-year-old LNG facility in Alaska, the U.S. has none of the liquefaction equipment required to prepare natural gas for export.

With natural gas selling in Europe at more than twice the $3.50 per million British thermal units it fetches in the United States, the payoff could be rich.

Of course, that assumes current prices hold over the time it would take to secure long-term delivery contracts and build export terminals, a process likely to take the better part of a decade.

Seeking outlets for an over-supplied market

Meanwhile, energy companies continue to pump billions of dollars into finding and producing more shale gas.

Rich Gordon of Gordon Energy Solutions, a research firm in Overland Park, Kan., estimated that since 2005, domestic and overseas operators have spent $135 billion securing shale gas acreage in the U.S.

This is quickly boosting output at home. The U.S. Energy Information Administration’s short-term energy outlook sees a 6.1% increase in domestic natural gas production in 2011, rising another 2% in 2012. All of the gains are from onshore drilling operations in the lower 48 states.

“The projected U.S. demand is not sufficient to absorb the supply from these fields,” Gordon said in an interview.

That leaves producers two obvious outlets to absorb future production: transportation fuel and LNG exports, he said.

So far, the EIA has no estimates for U.S. LNG sales overseas.

“It’s something we recognize as a possibility but we’re currently not explicitly modeling the competitiveness of U.S. LNG exports,” said Angelina LaRose, an analyst with the EIA.

The United States currently imports LNG, but doesn’t consume much of it. Instead, it heads out again to other overseas markets, LaRose said, citing a recent Energy Department report.

These so-called LNG re-exports rose sharply to 42.4 billion cubic feet the nine months ended Sept. 30, up from 34.5 billion cubic feet for all of 2010, with Brazil and India most often the final destination.

Risk factors

Despite the allure of the export market, it also carries major risks. As the technology used to produce shale gas spreads, it could boost supplies overseas, in turn hurting demand for U.S. LNG.

Stricter environmental regulations for handling water used in hydraulic fracturing, a key process in extracting shale gas, could push up production costs in the U.S., further pinching the price spread.

Shifting domestic energy policy could also be a major factor.

“Some overseas LNG customers are worried about political risk attached to LNG if the U.S. decides to try to keep more of its production at home,” said Mike Rieke, managing editor of LNG Daily for Platts.

Despite these risks, early movers in the U.S. LNG business continue to push ahead to meet growing energy demand worldwide.

Already a big re-exporter of LNG, Cheniere Energy Inc. LNG -1.01% is moving ever closer to building a $5 billion liquefaction-export facility at its Sabine Pass import terminal in Louisiana.

How the project pans out is being closely watched on Wall Street, where concerns have been raised over the company’s debt load.

“We believe progress in its liquefaction project may increase the likelihood of future cash flows to Cheniere, and improve the prospects of refinancing its 2012 debt maturities,” Standard & Poor’s analysts Mark Habib and Nora Pickens said in a note to clients.

Standard & Poor’s said they plan to maintain their negative outlook rating on Cheniere, “until there is greater certainty of the project’s development, capital structure and cash flow.”

Among its latest efforts to launch an LNG export business, Cheniere last month signed a 20-year agreement to deliver LNG to Gas Natural Fenosa, the largest integrated energy provider in Spain and Latin America.

Cheniere Energy

Sabine Pass LNG facility with LNG vessel in the berth.

Along with a 20-year LNG sales pact with Britain’s BG Group PLC UK:BG +0.15%  announced in October, Cheniere said the Fenosa contract will help support initial construction of its Sabine Pass liquefaction facility.

Cheniere said it aims to begin construction on the plant next year, with start-up slated for 2015.

With an eye on the prize, Cheniere Energy Partners CQP +1.56% — Cheniere’s limited partnership that directly owns the Sabine LNG terminal — said engineering giant Bechtel will design, construct and commission two liquefaction trains using the technology developed by ConocoPhillips COP +0.37% .

On the regulatory front, Cheniere already has secured the Energy Department’s approval to export LNG but still needs to clear the request with the Federal Energy Regulatory Commission.

Deep-pocketed Dominion

Weighing in with a market cap of $28 billion, Richmond, Va.-based Dominion Resources D -0.36%  is known primarily as an electric power company, but it also operates the nation’s largest natural gas storage system, with 947 billion cubic feet of capacity, which it uses to supply customers in 15 states.

Dominion’s Cove Point LNG facility at Lusby, Md., on Chesapeake Bay, is one of the nation’s largest. Purchased from Williams WMB -0.72%  in 2002, Dominion has since expanded Cove Point’s storage and production capacity by nearly 80%.

In October, Dominion Cove Point received Department of Energy approval to enter LNG supply contracts of up to 365 billion cubic feet per year for 25 years with overseas customers.

Dominion CEO Thomas Farrell recently told analysts that interest in its proposed Cove Point liquefaction project has grown as producers in the Appalachian basin look for ways to reach customers in Europe and Asia.

Cautious Exxon Mobil

As big as Dominion is, it’s dwarfed by Exxon Mobil, which has the clout to shape global agendas in the energy business. But given the ups and downs of the LNG market, the company is taking a cautious stance.

As domestic gas production soared, Exxon last year decided to scrap plans to build an LNG import facility off New Jersey.

Nevertheless, Exxon’s Swiger said the company expects some movement in the industry toward shipping LNG abroad. “You’re probably going to see some projects go ahead,” he said. “We may or may not be a part of that.”

Swiger said the company won’t make a move until it is “really satisfied that we’re going to generate the right kind of value for our shareholders when we make…a big-ticket, front-end investment like that on their behalf.”

Pressure from afar

Still, plenty of doubts remain about the viability of LNG exports from the U.S. as other big LNG projects move ahead elsewhere.

Chevron Australia

Aerial view of the Gorgon LNG plant site being built on Barrow Island.

Chevron CVX +0.35% for example, is spending billions of dollars on its Gorgon and Wheatstone LNG projects off Australia’s west coast.

And in recent days, Anadarko Petroleum APC -0.81% CVX +0.35% said it’s studying a possible LNG facility in Mozambique to bring to market gas from promising discoveries it’s made off the coast of the east African country. See story on Anadarko Petroleum’s Mozambique update.

Fadel Gheit, an industry analyst with Oppenheimer & Co., remains bearish on U.S. LNG exports unless big players like Exxon Mobil and No. 2 U.S. natural gas producer Chesapeake Energy Corp. CHK -0.24%  decide it’s in their interest to take part directly.

“I was never convinced that the U.S. is running out of gas, or oil, but that didn’t stop companies from building LNG receiving terminals,” Gheit said.

”I am equally unconvinced that U.S. gas can compete in the global LNG market with the current dominant players, but that is not going to stop companies from building LNG export terminals in the U.S,” he said.

Steve Gelsi is a reporter for MarketWatch in New York.

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