Shale Gas 2010

More on US Gas exports

Further discussion at Reuters on the Cheniere LNG export story,  good to see that it may give hints of what prices in Europe are likely to be  later this decade.

Cheniere Energy Inc made a bad bet when it opened the biggest liquefied natural gas import terminal in the United States in 2008 just as large increases in domestic gas production flooded the market.

Now, as Cheniere embarks on a plan to invest billions to export U.S. gas to Europe, the Houston-based LNG importer could be making a similar mistake in reverse.

A mix of high construction costs, questionable gas pricing assumptions and U.S. political opposition to energy exports means that Cheniere may have picked the wrong time to begin trying to export U.S. natural gas. 

I don't agree so much on the politics part.  I think the plan wouldn't go ahead without some sort of government nod already.  Future nods do depend on the situation in five years and it seems from this that the future of shale is going to be even bigger, with enough for everyone.  Remember the Eagle Ford is going to ramp up big time by then and Eagle Ford is currently being looked at by India's Reliance and France's Total.   Eagle Ford is going to be at least bigger than Haynesville, but with easier gas and plenty of oil. 

So if the economics don't make sense now, things change:

I am not sure the economics work out in Cheniere's favor," said Zach Allen at Pan Eurasian analysts in Raleigh North Carolina.

"Cheniere is either projecting some change in the market that is going to force LNG prices up to oil parity or it doesn't work."

But Cheniere may be crazy like a fox. This is where it starts getting complicated:

Cheniere says it can sell U.S. LNG into Europe cheaper than European pipeline supply.

In a presentation on June 4, Cheniere's chief executive Charif Souki, said that at Henry Hub prices of $4.50 per mmBtu, Cheniere could get LNG to Europe for $7.45 per mmBtu, after $1.50 in terminal charges and $1 shipping. At $6.50 Henry Hub, it would cost $9.65 to get the LNG to Europe.

"They have to get about $8-10 (per mmBtu in Europe) at present Henry Hub prices for the project to work and that is not what LNG is going into Europe for now," Allen said.

According to Allen, oil-indexed pipeline supply from Russia to Germany in May was around $7.80 when adjusted for heat content. Spot LNG imports, indexed to gas prices, are currently even lower.

Five years is a long time in the gas business. For proof of that visit Argus LNG's web site.  The free sample they offer is like a time machine and only three years ago! Among other things in April 2007:

US firm Cheniere Energy is convinced that the US, with its year- round demand, will become the swing market and sponge for world LNG, absorbing volumes not needed in Europe and Asia- Pacific. In preparation, the Houston-based firm is building two regasification terminals on the Gulf of Mexico — at Freeport, Texas, and Sabine Pass, Louisiana — has full permits for two others, and is discussing long-term LNG supplies.

“The fundamentals are that US production is falling. Gas from the deep offshore and non-conventional gas costs at least $6/mn Btu to produce, Canada is exporting less as its own needs grow and US demand is rising by 2pc/yr,” executive director of Cheniere LNG Jean Abiteboul tells Argus. “Only LNG can fill the gap.”

Back to the future today at Cheniere:

Cheniere has bet that buyers and sellers will be willing to invest in its export project on the assumption that ample U.S gas supply will help keep prices far below oil-indexed prices in Europe for the next 20 years. The project will not reach a final investment decision without signed long term contracts.

Long term oil linked contracts in Europe can be very long.  But each year one or two slip below the horizon and they won't resurface. This might work with the big drop in North Sea, Norway and Netherlands  production after 2020.  But if shale does take off in Europe, then maybe we'll be reading about this story and laughing in 5 years again.

One thing for sure.  Just the threat, or hope, of LNG exports from the US to Europe will keep people honest. A clear cut example of how shale gas changes everything.