• 3 minutes Nucelar Deal Is Dead? Iran Distances Itself Further From ND, Alarming Russia And France
  • 5 minutes Don Jr. Tweets name Ukraine Whistleblower, Eric Ciaramella. Worked for CIA during Obama Administration, Hold over to Trump National Security Counsel under Gen McCallister, more . . . .
  • 9 minutes Shale pioneer Chesepeak will file bankruptcy soon. FINALLY ! The consolidation begins
  • 12 minutes China's Blueprint For Global Power
  • 6 hours EU has already lost the Trump vs. EU Trade War
  • 14 hours Judge Orders Trump To Release Tax Returns
  • 2 hours Who writes this stuff? "Crude Prices Swing Between Gains, Losses"
  • 2 hours Climate Change Consensus Shifts in Wind, But Gas Is Still the Right Move
  • 3 hours World oil demand will keep growing until 2030, climate-damaging emissions longer, says IEA
  • 9 hours Shale Gas News – November 9, 2019
  • 11 hours ''Err ... but Trump ...?'' #thedonkeystays
  • 5 hours Does .001 of Atmosphere Control Earth's Climate?!
  • 15 hours Offshore SE Asia: Offshore OFS Could Get Major Boost in SE Asia
  • 5 hours Atty General Barr likely subpeona so called whistleblower and "leaker" Eric Ciaramella
  • 14 hours The lies and follies of the "cry wolf" enviros: No more fire in the kitchen: Cities are banning natural gas in homes to save the planet
  • 15 hours Saudi Aramco IPO Will Not Save Kingdom
  • 5 hours Joe Biden, his son Hunter Biden, Ukraine Oil & Gas exploration company Burisma, and 2020 U.S. election shenanigans
  • 15 hours China's Renewables Boom Hits the Wall
Michael Doyle

Michael Doyle

Michael Doyle began his energy trading career for AIG Trading Corp., in 1990, trading oil during the Gulf War. In 1997 he went to JP…

More Info

Premium Content

Pipeline to Nowhere?

Last week the news headlines blazed on about the proposed natural gas project in Alaska between Exxon, Conoco and Trans-Canada to build a pipeline over 800 miles long to run from Alaska’s North Slope on to Asia.  Talk was of the 15,000 jobs to be created and the revenues to be rewarded for the 10-year endeavour. Richard Bass argues in Forbes that exporting LNG to Asia would be helpful to the North American gas market.  Maybe we should think this one through a little.

The price most often associated with the U.S. natural gas market is the daily price at Henry Hub in Louisiana. The NYMEX division at CME Group bases their most popular natural gas futures contract on this delivery point. The price has been a little under the weather, to say the least, when looking at historical prices.  This is due mainly to the rather lofty supply of “dry gas” in storage. Dry gas is generally the output that you get from wells in the Gulf of Mexico and onshore wells that only output natural gas.

For the last few years much has been made of the drilling in shale areas. New technology has made these areas reachable for the drilling of oil and gas, in the form of natural gas liquids. Once extracted, a residual by-product of this “wet gas” happens to be more “dry gas”. 

Related Article: Drowning in Natural Gas: Is the Answer Exports?

The oddity in all this is that natural gas liquids are priced in the form of price-per-barrel, as oil is.  The price of wet gas tends to track overall petroleum prices a little better than dry natural gas does.  So, as the price of oil stays above $90 per barrel, it pays to keep drilling shale for oil and “wet gas”.  Producers would continue to sell “dry gas” almost down to the price of $zero as it is not the main target.  Supply continues to build even as rig counts for natural gas plummet.

Natural gas also is what industry folk call “a lower 48-state commodity”, meaning it’s pretty much land-locked to the U.S. We have the capacity to import gas in the form of LNG.  We just do not have much capacity to export LNG.

Here’s the punchline: spending $65 billion (probably much more) to send Alaskan natural gas to Asia will not do much for anybody south of Canada.  North Slope natural gas will probably rise in price to merge toward the Asian price of about $17/mmBTU (don’t worry about what that means), but Henry Hub may still linger in the $3.00-5.00 range for as long as oil stays over $80.  Also, at that price for the pipeline, and assuming a 27-year straight write-down, that’s going to cost about $8mm/day during production. That’s to accommodate production of about the equivalent of 350 NYMEX futures contracts per day (3.5 billion cu. feet). That works out to an added cost of about $2.20 per NYMEX equivalent, which seems expensive at current prices of $3.50.

Related Article: The Swing Vote That Could Switch Natural Gas Back to Coal

Why are we in such a hurry to sell a natural resource to Asia to capture a fast arbitrage?  The point is not lost; after all, a profit is a profit.  Yet, maybe we can turn what appears to be a sorry state of affairs for the natural gas patch into a boon for industrial production. As labor costs in Asia rally and their consumption engine continues to grind on, maybe there is opportunity here to use a low cost energy (read; manufacturing) supply combined with a hard-hit domestic labor market and produce something to export.  The logistics really come down to labor costs and with unemployment the way it is maybe there’s negotiable room here.  Maybe Exxon should hold off on adding to their natural gas portfolio and add some joint ventures in the industrial area and make use of a cheap source of energy as a competitive advantage (ghost of John D.?).  Just an idea…

By. Michael Doyle




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • bmz on October 11 2012 said:
    Because of the pipeline cost, it is not cost effective to ship Alaskan gas to the lower 48(wet or dry shale gas is cheaper); so selling it to Asia appears to be the best use of the gas. Let the market decide.
  • JK Smith on October 11 2012 said:
    $65 Billion is pricey, but it equals a lot of jobs even in the L48. Look at the revenue side too - at $14/MMBTU your looking at 512 billion over 27 years.

    The project means a lot to Alaska, I say go for it and let free markets do their magic.

    http://alaska-gas-pipeline.blogspot.com/
  • Roland on October 11 2012 said:
    Why not build a smaller liquids pipeline next to the existing liquids pipeline, shut down the old pipeline for maintenance, then convert it to dry gas? Liquid volume from the NSlope has fallen quite a bit.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play