'EXXONMOBIL has a loaded gun pointed at the US natural gas market-and it is not the only one.
The ammunition is liquified natural gas.Exxon is scheduled to start up up another three LNG projects in Qatar this year.They will produce more than 3 billion cubic feet per day of natural gas and freeze it for transportation.
Europe and Asia are potential markets.But the US could be a magnet for LNG cargoes despite not really needing it- a paradox that spells low prices.
LNG is joining up the worlds hitherto regional natural gas markets just as demand is faltering.
Declining natural gas production in countries such as the US and Britain and rising energy prices prompted LNG production and receiving terminals to sprout on coastlines around the world.
Two things have turned this scenario on it's head.One is recession.The other is the developement of unconventional natural gas resources in the US leaving it oversupplied for now.
Several Wall street analysts expect inventories to reach the maximum capacity of around 3.9 trillion cubic feet later this year.
So why would anyone ship LNG to the US?
In part it is simple economics.Many projects were sanctioned and financed when lower natural gas prices prevailed.
In Exxons case,valuable liquids also produced in its Qatari projects take the market break even price of the natural gas itself "towards zero" says Deutsche Bank analyst Paul Sankey
Factoring in processing and shipping costs,that gas can be landed in the US for less than $US2 ($2.48) per million BTU...
The current Nymex price is about $US4.
Competing markets also look oversupplied.Wood Mackenzie estimates annual demand in East and Southeast Asia will rise by 1.3 trillion cubic feet by 2015.
New projectstargeting the region and close to final investment decision amount to more than 2 trillion cubic feet of capacity
In Europe the prevalance of long term pipeline contracts limits the size of the market up for grabs
Wood Mackenzie estimates about 4.9 trillion cubic feet of discretionary piped and LNG per year will compete for a market half that size for the next three years.
The US,with its large LNG market will be natural destination for this surplus LNG.
As a cap on prices,this effect of globalisation in the natural gas market is great news for customers.
In a buyers market,though higher cost sellers suffer.A big increase in low cost LNG supply would displace some US natural gas production.
The average US field requires a Nymex natural gas price of $US 7.79 per million BTU to earn a 10 per cent return on capital according to Jonathan Wolff at Credt Suisse.
As Mr Wolff point out,natural gas drillers capital expenditure is still out pacing cash flow,as it has`since 2006.
Despite this the number of operating natural gas rigs actually rose last week.
A`question haunting the sector is why majors such as Exxon have not rushed in to scoop up distressed companies sitting on large natural gas reserves in the US.
The answer may be that,with more LNG pointed at already week markets they can afford to take time and take aim'
Sorry about the length but felt it worth posting verbatim.
MAE Price at posting:
27.0¢ Sentiment: None Disclosure: Held
