The LNG Era Just Moved One Step Closer
A major U.S. utility just made a significant move into the future of liquefied natural gas (LNG) – to surprisingly little fanfare or media attention.
You, of course, will get the full scoop on why it's so important.
Last week, Dominion Resources Inc. (NYSE:D) applied for permission to turn part of its Cove Point, Md., terminal into an export facility.
Cove Point is already the largest LNG receiving installation on the Eastern seaboard of the U.S.
When it became operational back in the 1970s, the assumption was that LNG imports would account for at least 15% of the natural gas used in the American market.
Of course, that was before the U.S. realized how much unconventional volume (primarily shale gas) was extractable from within its own borders.
Thanks to this terrific abundance of gas here, there is no need to import any gas any more (save for what's used in the occasional balancing of supply and demand in localized areas, or to augment swap contracts entered into by some of the larger players internationally).
But there is a rising concern over what it will mean for the price of natural gas.
That's because estimates of available volume are, well, staggering.
Without breaking a sweat, the American industry could increase overall production by 20% to 25% a year for several decades. And that's before any technical advances that could allow for the retrieval of additional volume above current projections.
Sounds great… but it is also a cause for great concern. And it is particularly worrisome in the fastest-growing production basin in the U.S. – the Marcellus Shale.
In the past two years, expected volume from the Marcellus in Pennsylvania and West Virginia has skyrocketed. (Production in New York is currently subject to a moratorium.) And with it has emerged the prospect of a gas glut that would depress prices – badly.
The challenge is to find usages for all of this newfound gas.
There are three major ones…
1) As a Solution to the Coal Problem
Some of this added volume will go toward replacing coal as a fuel source in the generation of electricity.
The balance is swinging decidedly in favor of natural gas as the preferred power source.
Older coal-fired generating facilities are under pressure.
That's due to a combination of the prospect of predictable and stable prices for natural gas, a lower carbon footprint, and the introduction of new non-carbon regulations in mercury, nitrous, and sulfurous oxide emissions requirements (“Two Non-Carbon Regulations About to Rock the Coal Sector,” October 29, 2010).
I now look for an additional 20% to 25% jump in the use of natural gas to produce electricity in the U.S. by 2020.
The industry also sees this reality. Not a single new coal-fired or co-fueled power plant (able to use both coal and gas) is being planned anywhere in the country.
2) As a Fuel for Transportation
Then there is the prospect of moving to a more gas-based transport system. There are signs of this really starting to rev up.
In both Canada and the U.S., there are frequent new developments in retrofitting trucking fleets from diesel to compressed natural gas (CNG), liquid petroleum gas (LPG), and LNG.
Within just a few years, upwards of 20% of municipal buses will run on natural gas rather than oil products.
Yellow Cab just rolled out its very first CNG-powered taxis
onto the streets of Los Angeles.
Yet the real push into transport will take some time. So in the meantime, finding additional usages for all of this newfound gas is still a challenge.
(That is where the importance of this new LNG export venue comes in to play.)
3) As LNG for Export
Natural gas pricing has traditionally been a local market matter. That's because supply is essentially limited by where the pipelines go.
With LNG, however, the gas is cooled into a liquid state, allowing it to be moved by tanker – more easily, at lower costs, and over greater distances.
This then facilitates the creation of spot markets, enabling the more rapid sale of available volume and leverage on longer-term pipeline contracts.
Both Asia and Europe have a prominent need for this.
Asia has been the global region in which some two-thirds of LNG would be consumed, primarily by Japan and South Korea. Following the Japanese nuclear tragedy in March and its impact on power production in the country, that need is now even greater.
The European outlet, however, has introduced another major opportunity.
New LNG receiving terminals are opening on the Continent as Europe seeks to wrestle itself out of 20- to 25-year commitments for piped gas from Russia. These carry hefty “take or pay” provisions (requiring that at least 70% of the contracted volume either be received or paid for anyway), and pricing is tied to a basket of oil and oil products (increasing in price as oil does).
The rapidly developing LNG spot market in Europe has both a commercial and political advantage. It counter-balances pipeline prices and forces Russian Gazprom – the largest natural gas company on earth – to renegotiate some of its contract provisions.
That market is largely dependent on LNG coming from Qatar and Algeria. It would welcome expanding imports from other suppliers…
Like the Marcellus – via Cove Point.
I have argued for this move for some time (“A Solution for North America's Natural Gas Surplus,” November 2, 2010). And actually, Dominion isn't the first to make it.
Cheniere Energy Inc. (with the very appropriate ticker symbol AMEX:LNG) was the first company to secure permission – from the U.S. Department of Energy – to export LNG to any country not on a sanctions list. Cheniere runs the Sabine Pass terminal complex on the border of Texas and Louisiana. It has locked in multi-year deals with several major global LNG importers.
In Canada, too, they're moving in the same direction. Construction has begun at the Kitimat terminal on the coast of British Columbia.
When it was designed, Kitimat was set to be an import facility. Now it will export LNG developed from the vast shale gas reserves in both BC and Alberta. That volume will move to Asia.
However, the Dominion move from last week is unique in a very important way.
It has the great benefit of being squarely connected to a rapidly accelerating and specific basin source and targeting the quickly expanding European market.
The U.S. can satisfy its domestic gas requirements many times over each year…
Exporting the rest of it seems like a very positive way to improve the overall sector picture, augment return, and generate jobs – without having to address a joint session of Congress.