Shale plays are changing the natural gas industry Richard Thompson, The Times-Picayune Posted:05/29/2011 6:47 AM Until just a few years ago, the petroleum industry was making plans to develop dozens of new North American terminals for importing liquefied natural gas.
New facilities and the expansion of existing ones, many believed, would be necessary as the nation struggled to meet its energy needs and turned increasingly to imported liquid natural gas. But the development of shale gas plays across the country, including the Haynesville formation in northwest Louisiana, seem to have changed all that by making natural gas more readily available from domestic sources.
Shale gas made up 14 percent of the country's total natural gas supply in 2009, and production of the fuel almost doubled between 2008 and 2009, according to the Department of Energy. Industry experts say that the new horizontal drilling and fracking methods have reduced the need for the U.S. to import large quantities of liquid natural gas.
"At one point, there were 44 plants that were proposed to do just that," Eric Smith, the associate director of the Tulane Energy Institute, said of the import terminals proposed in years past. "Then the market didn't really develop because, in the meantime ... the shale gas phenomenon took off."
As a result, the natural gas industry has started to switch gears. Rather than developing infrastructure to handle a spike in natural gas imports, the industry is readying facilities that can also be used to export excess fuel to international markets. And some of those proposed import terminals are being reformatted so that they can also handle exports.
Approval for exports
Earlier this month, the Department of Energy gave Cheniere Energy tentative approval to export liquefied natural gas, known as LNG, from its Sabine Pass LNG Terminal in Cameron Parish, a project that is expected to create thousands of construction and production jobs. And in Lake Charles, Houston-based Southern Union Co. and British gas producer BG Group are seeking federal approval to export more than 2 billion cubic feet per day of natural gas over a 25-year period from an existing LNG import terminal.
"Once it became very clear that there was going to be adequate supply for domestic consumption, and the domestic consumption wasn't going to increase as far as some people predicted, then the next logical thing to do was look for ways to export it," said Mukul Sharma, a professor in the department of petroleum and geosystems engineering at the University of Texas at Austin.
So far, investors have responded: After the Energy Department approved Cheniere's plan on May 20, shares of the Houston-based company rose 31 percent. While Energy Department officials say the plan is subject to final environmental and regulatory approval, some industry experts suggest that it is a formality.
Freeport LNG in Texas has also applied to export LNG. Terminals along the Gulf of Mexico rather than those along the East Coast, like in Massachusetts and Maryland, pose a more likely option for becoming export facilities, industry experts say. But determining how many of the operators of the existing 14 LNG terminals in North America turn to exporting will depend on both the price of oil and natural gas, Sharma said.
Not quick to convert
Smith said he believes that exporting LNG will "basically open up the shale gas markets," but added that he does not anticipate there will be a rush of other import terminals converting to export terminals. It'll also depend on the success of the early conversions, he said.
"I don't see all 14 of them converting tomorrow," he said.
Instead, Smith predicts there will be competition from shale gas plays in other countries. "I think the other thing that people need to realize is that we have a lot of shale in the United States, but there are other parts of the world that have shale as well," he said.
The emergence of shale plays as a viable, low-cost supply of natural gas has cut into the need for new LNG terminals, despite proposals for new facilities, operators of the terminal in Lake Charles contended in a filing with the Federal Energy Regulatory Commission last month.
And because the U.S. has not relied as heavily on LNG imports, many of the facilities have operated under capacity.
Smith agreed. "That's why people are attempting to come up with alternative uses for these things, and the Sabine Pass option is the first one to get the government permits to do it," he said.
Still, the move toward exporting LNG has drawn concern from some industrial operators who rely on natural gas, and for whom the vast supplies and low prices have been beneficial. And some critics have expressed concerns that the export terminals, which cool and compress the natural gas into a liquid before it is shipped overseas, could be potential terrorist targets, especially near densely populated areas.
Opening new markets
On the other end, natural gas producers, supporting large investments in mineral rights and existing facilities, are working to open up new markets for the LNG they are producing.
Larger forces could also help drive new demand for natural gas: The Obama administration has outlined plans for an energy policy that includes putting 1 million electric cars on the road by 2015, and boosting investment in natural gas vehicles.
Sharma said the additional electric vehicles could bring about a higher demand for the relatively clean-burning natural gas. Similarly, many observers of the nuclear power industry are watching to see if the ongoing crisis in Japan could again curb efforts toward a nuclear renaissance in the United States and, in turn, bolster demand in natural gas.
"Natural gas certainly takes on more center stage than it did before in the U.S.," he said. "I think a lot of the demand for natural gas is going to be determined by how the Obama administration really moves forward in terms of an energy policy, and the kind of incentives and the kind of investments they make in the utilization of natural gas."
Richard Thompson can be reached at [email protected] or 504.826.3496.
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