TH: Gas glut in the US blasts Gladstone growth plans
FIVE years ago, then Woodside Petroleum chief Don Voelte was saying a North American gas shortage had made the price outlook so good he would make money sending LNG tankers on a 57-day round trip from the top of Western Australia, past the Cape of Good Hope and up to the US northeast.
What a difference some drilling technology advances make.
Now, a gas glut brought on by better shale gas extraction techniques could make the US a net exporter, threatening Australian liquefied natural gas growth as oil majors eye North American gas that comes with already extensive pipeline networks to take it to planned coastal plants.
The glut is also threatening profits at Australia's biggest company, BHP Billiton, which last year made what now looks like an ill-timed $US20.1 billion splash in the US shale gas pond.
This week, the gas oversupply sent US domestic prices crashing below $US2 per mmbtu (million metric British thermal units) for the first time in more than a decade.
They are now half what they were in August, when BHP completed its shale gas purchases and one-seventh of the $US13.58 high they hit in 2008 before the technology breakthrough and the global financial crisis.
The worsening outlook for US gas prices has led to the rapid formation of LNG plans in the US and the connected Canadian markets, as the economics improve of exporting the gas to Asia after freezing it.
"When you look at some planned Australian projects, you have to wonder whether they are competitive" with North American gas, UBS energy analyst Gordon Ramsay said.
"The buyers also have some leverage now. They can turn around and say they can buy from the US," Mr Ramsay added.
In Japan, landed LNG prices are about $US17 per mmBtu -- more than double the estimated $US8 cost of shipping gas from the Gulf of Mexico (once a planned widening of the Panama Canal is finished in 2014) at current US domestic prices.
There are now seven big planned US projects with designs to export a total of more than 100 million tonnes of LNG a year.
Only one, the 15 million tonne a year Sabine Pass project run by previous LNG importer Cheniere Energy, has contracted its gas.
But British gas giant BG Group, a Sabine Pass gas buyer and a Queensland LNG proponent, says the US could be exporting 45 million tonnes of LNG annually by 2020.
In comparison, Australia, the world's fourth-biggest LNG exporter, now exports about 20 million tonnes a year but has projects under construction that should lift exports to four times that by 2020.
All those projects have contracted their gas at prices linked to global oil, meaning they are not threatened by the rapidly growing North American industry.
But new projects, such as Woodside's Browse LNG project and project expansions now face a new competitor.
Mr Ramsay said Sabine Pass and some other projects in the US and Canada would go ahead but there were a lot of problems in the US that could see result in exports being limited by governments, particularly if there was any sign they were driving up prices.
On top of having a cheap source of gas, US LNG plants are 40-50 per cent cheaper to build than a new project in Australia.
An existing pipeline network takes the gas to new plants, and disused LNG import terminals provide storage and wharf infrastructure.
The main challenge to US exports is political forces that want to retain low gas prices that are helping the country's manufacturers get back on their feet.
BG boss Frank Chapman says the 45 million tonnes a year won't have a big impact on prices because it represents only about 10 per cent of US gas supply, but a US Department of Energy report in January said prices could rise as much 50 per cent under its most pessimistic scenario if exports were allowed.
The major hurdle for most planned plants is getting US government approval to sell to countries that do not have a free-trade agreement with the US, which is most of the big LNG buyers.
Sabine Pass has been given permission to sell 15 million tonnes of LNG a year from 2015, but others projects' approvals are stalled.
Sabine Pass plans to export the same amount of LNG that the $43bn Gorgon project, Australia's most expensive resource development, will export when it comes online in 2014.
On top of the US plans, Apache is planning to export 5 million tonnes of LNG annually from its Kitimat project in British Columbia, and a joint venture of Royal Dutch Shell, Mitsubishi, China National Petroleum and Korea Gas is considering a $US12bn, 12 million tonne a year LNG plant nearby.
Things are moving quickly.
In October, BG listed an expansion of its Queensland Curtis LNG plant at Gladstone as its main option to meet 2020 growth targets.
By February, Gladstone was replaced with Sabine Pass and Sir Frank said he was in no rush to expand the Queensland project.
Also since October, Cheniere's share price has risen fourfold as the probability increased of Sabine Pass becoming a reality.
Shell's Australian joint venture with PetroChina, Arrow Energy, is planning exports from Gladstone. Despite the project being more than a year away from approval, Arrow chief executive Andrew Faulkner said he did not feel threatened by the LNG developments in North America.
"We have already sold all our LNG to our two parents, so we are in the very positive position of having to not worry about the global LNG market" he said.
"All the support I have seen from Shell and PetroChina over the last two years and the fact our budget this year is $1bn gives you a clear indication of the confidence" they have in the project.
Petronas, which has a stake in the Santos-run Gladstone LNG plant, last month said it was studying a $US5bn Canadian gas acquisition with a view to exports, moving Canada alongside Australia as its major LNG growth focus.
Offsetting the North American projects is the fact that LNG demand has grown beyond expectations since the Fukushima nuclear disaster increased the reliance on gas of Japan, already the world's biggest LNG importer.
But the rapid development of a scenario that could expose LNG buyers to the depressed US market will at make negotiations between buyers and Australian sellers harder.
Credit Suisse Japan energy analyst Yuji Nishiyama said security of supply took precedence over price for Japanese buyers, meaning many may be reluctant to back US projects.
But that does not mean they won't use them for leverage.
"Greater choice should intensify competition among suppliers, pushing down prices," Mr Nishiyama said.
Right now, the export plans are not boosting US price expectations. Yesterday, Credit Suisse reduced its long-term US gas price expectation from $US5.50 per mmBtu to $US4.50, while on Thursday, UBS knocked a dollar off its 2013 forecast of $US4.70, but kept its long-term forecast at $US5.50.
