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Australia’s LNG Woes: A Glimpse Into The Future For The U.S.?

LNG

Two times last winter, Australians living in the country's eastern region paid more than twice as much for natural gas as did Japanese customers taking delivery of liquefied natural gas (LNG) from the same region. (Australia has three separate natural gas pipeline networks which create three domestic natural gas markets, Eastern, Northern and Western.)

The price spikes had eastern natural gas users, particularly business users, hopping mad about what they perceive as foolish energy policy. That policy, they say, gives away Australian energy resources at bargain prices to foreign countries while making domestic industries that are reliant on those resources less competitive because of high energy costs. In addition, the new volatility in gas prices makes planning difficult and expansion financially risky.

The dust-up in Australia has some people thinking that the same thing could happen in the United States, something I pointed out in 2013. In the United States the Federal Energy Regulatory Commission has approved natural gas export terminals with a capacity of 17 billion cubic feet (bcf) per day. That represents 19 percent of current U.S. natural gas production. If all terminals for which applications are pending or expected are included, the number goes up to 42 bcf per day or about 47 percent of current production. Only one U.S. export facility is currently in operation in the lower 48 states. Another facility in Alaska has been exporting LNG to Asia since 1969.

It's worth noting that U.S. marketed natural gas production is down a little over 1 percent for the 12-month period ending November 2016. During the same 12-month period net imports were about 654 bcf or about 2.7 percent of total consumption. That's right. The United States remains a net importer of natural gas even as it contemplates a major expansion of LNG export capacity.

Back in Australia electricity blackouts in the state of South Australia are being blamed partly on the mothballing of a major new natural-gas-fired electric generating plant. The operator had contracted for large deliveries of natural gas at low prices to fuel the plant. But with the price of LNG exports from Australia soaring, it became so profitable to resell the gas for export that the plant was never opened. (That was before the domestic price spike. But by then the plant's gas was already committed.)

The rapid expansion of natural-gas-fired electricity generating plants in the United States leaves the country vulnerable to similar dynamics that also include higher electricity rates. Most utilities get to pass fuel price increases on to their customers. And, LNG exporters cannot withhold deliveries and sell their contracted gas back into the domestic market if prices spike. They are obliged by long-term contracts with their customers to deliver. In addition, LNG customers are typically bound by take-or-pay contracts which oblige them to take LNG deliveries or pay for them anyway. Which do you think they'll choose to do? Related: OPEC Ready To Cut Deeper

The U.S. natural gas industry argues that natural gas production is bound to rise and keep on rising for a long time. The U.S. Energy Information Administration (EIA) is forecasting a continuous increase in annual U.S. production through 2050 when production is supposed to reach 40 trillion cubic feet (tcf), up from just 26.5 tcf in 2016. The EIA is basing its forecast on dramatic gains in so-called shale gas production since conventional gas production continues to decline.

But the reality is already much different. As geoscientist David Hughes tells us in Shale Gas Reality Check published in December 2016:

Shale gas production overall has declined by 4.7% since peaking in February 2016 (down 2.1 billion cubic feet per day...). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38% and 52%, respectively.

Higher prices might turn the trend around. But higher prices will also make LNG exports less attractive to world markets. A deeper reading of Shale Gas Reality Check--which provides detailed analysis of all major shale gas plays based on actual production trends, not company press releases--suggests a declining U.S. natural gas industry rather than a growing one in the years ahead.

The industry promise of large and growing supplies at low prices was a fiction from the beginning designed to get regulators to approve export facilities that would bring U.S. natural gas prices closer to world levels--and thus make the natural gas industry more profitable.

There is actually a principled argument for the industry position. But it would be popular neither with voters nor with the legislators who represent them, and the industry understood this. Here is the argument: The natural gas industry should be allowed to sell its products to the highest bidder anywhere in the world just like every other industry in America. If we are now truly in a global economy, then natural gas should become a global commodity and Americans should pay the global price.

Some governments, however, perceive that the central role of energy in the economy warrants special rules that retain domestic energy sources for domestic uses. After all, nothing gets done without energy. Along these lines the Australian government is currently getting an earful from irate natural gas business and household customers.

In theory, environmentalists should be content to see fossil fuel prices including natural gas prices drift higher in the United States. That makes renewable energy more attractive to investors. But environmentalists fear that providing an outlet for America's shale gas via LNG to world markets will only make the environmental nightmare associated with fracking in shale gas fields that much worse. The industry would then be able to go after deposits that only higher world prices make viable. Related: How Long Can The Permian Craze Continue?

In all likelihood, many of the proposed LNG export projects in the United States will never be built. Glutted world LNG markets are giving investors pause. As it turns out, the U.S. natural gas industry wasn't the only one that saw opportunity in gaining access to the LNG export market.

Whether the United States will see more frequent natural gas price spikes or an overall long-term increase in domestic natural gas prices will depend partly on how investors and regulators perceive the availability of future U.S. natural gas supplies and the conditions of the LNG export market. On balance, the evidence suggests that they remain too optimistic about both.

By Kurt Cobb via Resource Insights

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  • GREGORY FOREMAN on February 19 2017 said:
    The same scenario will be mirrored with respect to crude oil.

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