Asian Tigers Stalk U.S Gas as Louisiana Shale Profits Taper

Source: Cheniere Energy Inc. via Bloomberg

The Energy Department has already approved six proposals, including Cheniere Energy Inc.’s $10 billion plan to add LNG export capacity to the existing Sabine Pass import terminal in Louisiana. Close

The Energy Department has already approved six proposals, including Cheniere Energy... Read More

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Source: Cheniere Energy Inc. via Bloomberg

The Energy Department has already approved six proposals, including Cheniere Energy Inc.’s $10 billion plan to add LNG export capacity to the existing Sabine Pass import terminal in Louisiana.

DeSoto Parish, Louisiana, has a problem. The solution may lie 10,000 miles away in Jakarta.

A rustic stretch of bayous and timberland, DeSoto and other communities in the Haynesville shale formation have become victims of the energy industry’s success in extracting natural gas from deeply buried rock.

Even as U.S. gas production surges to a record, outpacing domestic demand, Haynesville output has slumped 40 percent since 2011 amid falling prices as companies shift rigs to reservoirs richer in lucrative oil and gas liquids. Tax revenue has tumbled by the same percentage over the past two years from a record $50 million in the parish, home to Civil War battlefields and Billy B’s Cajun Grill.

In Jakarta, a city of 10 million, high-rise buildings crowd the skyline and auto-rickshaws, motorcycles and taxis vie for space on gridlocked roads. Indonesia’s energy use may more than double from 2010 through 2035, according to the Asian Development Bank. As early as next year, cargoes of liquefied natural gas shipped from Gulf Coast terminals to fast-growing Asian countries will propel the region into the ranks of global gas exporters such as Qatar and Australia for the first time.

Price Stability

“LNG exports, if they do nothing else, will stabilize prices enough to make it profitable for gas companies to continue drilling here,” said Steven Brown, the administrator of the DeSoto Parish Police Jury. “We’ve seen a huge drop in sales tax since 2011, and that hasn’t been offset by growth in other revenue.”

Natural gas futures for next-month delivery on the New York Mercantile Exchange slumped to a decade-low of $1.902 per million British thermal units in 2012 amid a boom in production from shale formations including the Haynesville, down 88 percent from an all-time high of $15.78 per million Btu in 2005. Nymex gas soared 11 percent to settle at a five-year high of $6.149 per million Btu yesterday. It was down 1.1 percent at $6.083 per million Btu today.

Exports will help support U.S. gas prices at about $5.50 per million Btu in the long term, said Anthony Yuen, a strategist at Citigroup Inc. in New York. As of late January, the Energy Department was considering 25 applications from companies seeking to export domestic gas to countries that don’t have a free trade agreement with the U.S.

Export Proposals

The department has already approved six proposals, including Cheniere Energy Inc. (LNG)’s $10 billion plan to add LNG export capacity to the existing Sabine Pass import terminal in Louisiana. That project, scheduled to enter service in late 2015, would be the first to send gas produced in the contiguous U.S. overseas.

PT Pertamina, Indonesia’s state-owned oil and gas company, signed a 20-year contract in December to buy LNG from Cheniere, which plans to build a second export terminal in Corpus Christi, Texas. Indonesia, which the nonprofit International Gas Union in Oslo, Norway, identifies as the world’s fifth-largest LNG supplier, is overhauling export terminals in Sumatra and Central Java to accept gas shipped from other countries.

“We have some sources that we are targeting for LNG cargoes,” Hari Karyuliarto, gas director for Pertamina, said in an interview in Jakarta last month.

Record Production

Domestic LNG supply is “theoretically sufficient” to meet Indonesian demand, but imported cargoes have “flexibility in terms of prices and distribution,” Karyuliarto said.

London-based BG Group Plc (BG/), Barcelona-based Gas Natural Fenosa, GAIL India Ltd. (GAIL) and Korea Gas Corp. (036460) also have contracts to purchase gas from Cheniere.

“We’re providing a new source of supply and a new pricing mechanism,” said Katie Pipkin, a senior vice president at Cheniere in Houston. “It’s a great opportunity for U.S. producers, who will have a new market of their gas.”

Freeport LNG Development LP, which plans to begin exporting LNG from a plant in southeast Texas beginning in 2017, has signed 20-year contracts to process gas for Osaka Gas Co. (9532) and Chubu Electric Power Co. (9502), two of Japan’s largest utilities. Japan, the largest LNG importer, bought record volumes after the Fukushima nuclear accident in March 2011.

In 2011, ConocoPhillips’ (COP) Kenai plant in Alaska made the first sale of North American LNG to China. The terminal’s export license expired last year. ConocoPhillips has applied for a two-year permit to resume shipping cargoes from Kenai, Birger Balteskard, manager for global LNG marketing at ConocoPhillips, said in London yesterday.

Hydraulic Fracturing

Gas production in the U.S. will climb 2.2 percent this year to an all-time high of 71.76 billion cubic feet a day as improved technology boosts output from shale, according to the U.S. Energy Information Administration, the Energy Department’s statistical arm. Gas futures have gained 9.4 percent since the end of 2008, while Nymex crude oil has more than doubled as U.S. economic growth accelerates.

Energy companies unlock shale gas using a technique called hydraulic fracturing, or fracking, which involves using horizontal drilling, explosives and a high-pressure stream of water, sand and chemicals to blast open layers of rock.

The drop in gas prices has prompted companies including Chesapeake Energy Corp., (CHK) the nation’s second-largest gas producer, to shift drilling rigs from “dry gas” reservoirs like the Haynesville to more lucrative, liquids-rich formations, such as the Eagle Ford in Texas and the Marcellus in Appalachia.

Oil Moves

Chesapeake’s gas output averaged 3 billion cubic feet a day in the third quarter of 2013, down 10 percent from a year earlier, while oil production jumped 23 percent, the Oklahoma City-based company said. In July, Chesapeake sold interests in 9,600 net acres in DeSoto and Caddo parishes to Exco Resources Inc.

Even as some producers curtail gas drilling, output has surged 38 percent since 2005 amid rising shale production, EIA data show. Consumption has lagged, increasing 16 percent over the same period, mostly as a result of power plants switching to gas from higher-priced coal.

Demand growth from the manufacturing industry, including makers of fertilizer, chemicals and plastics, has been hampered by a lack of plant capacity. When the price of natural gas, a key component of ammonia production, quintupled from the beginning of 2000 to 2006, the number of U.S. plants making the household cleaner tumbled to 25 from 40, according to the U.S. Department of Agriculture.

Limited Use

Several new plants, including a $1.4 billion fertilizer project in Iowa spearheaded by Egypt’s Orascom Construction Industries, won’t be operational until 2015 or later. A $1.7 billion Dow Chemical Co. (DOW) plant in Texas that will produce ethylene, a plastics feedstock, has a planned 2017 in-service date. Taiwan’s Formosa Plastics Corp. (1301) is spending the same amount to expand an existing petrochemicals site in the state, with startup scheduled for 2016.

Natural gas use in vehicles, meanwhile, accounts for a small part of the U.S. market. In 2011, the most recent year for which data is available, there were 121,650 gas-fueled cars and trucks on the road, less than 1 percent of total registered vehicles, data from the EIA and the Bureau of Transportation Statistics show.

In contrast, U.S. gas demand from Asia is poised to soar as those countries seek alternatives to higher-priced imports from the Middle East, Australia and Russia, according to Citigroup Inc. Japan paid $16.49 per million Btu in December for LNG from Qatar, the world’s biggest exporter of the fuel, government data show. U.S. gas for next-month delivery at the benchmark Henry Hub in Louisiana averaged $4.277 in December.

Still Competitive

Gas from the U.S. will remain competitive with other sources of supply, even taking into account transportation costs and potential increases in North American gas prices, Citigroup’s Yuen said. U.S. exports to Asia and other regions may total 8 billion to 10 billion cubic feet a day by 2020, accounting for 20 percent of the global market, he said.

“Given where Asian prices are, U.S. LNG would still be very much in the money,” Yuen said in a phone interview.

Risks to the U.S. LNG export market remain. Work on a $5.25 billion expansion of the Panama Canal, which would cut shipping costs to Asia by allowing the passage of LNG tankers, was suspended earlier this month amid a dispute over cost overruns between the Panama Canal Authority and a group of construction firms. Talks are ongoing and “serious disagreements” remain, the authority said Feb. 18.

Lobbying Effort

America’s Energy Advantage, an industry group that includes Dow, Alcoa Inc. and Eastman Chemical Co., is lobbying the U.S. government to limit LNG exports, citing a possible increase in gas prices that would harm domestic companies.

“Current trends assure that producers, exporters, foreign and domestic investors, and our global competitors will win, while the rest of America loses – hardly an outcome which benefits the ’public interest,’ the group said in a Feb. 13 letter to Representative Fred Upton, a Michigan Republican who is chairman of U.S. House Energy and Commerce Committee.

For DeSoto and other municipalities in the Haynesville Shale, a new source of gas demand can’t come soon enough. Sales tax revenue in Carthage, east Texas, has declined over the past three years amid reduced drilling, Charles Thomas, executive director of the Carthage Improvement Corp. and former city manager, said in a phone interview.

‘‘The exporting of liquefied natural gas would really help us,” Thomas said.

-- With assistance from Fitri Wulandari in Jakarta. Editors: Philip Revzin, Dan Stets,

To contact the reporter on this story: Christine Buurma in New York at cbuurma1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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