Fracker's Dilemma Points Bayou Gas Producers to Asia

Source: Courtesy Cheniere Energy

Cheniere Energy Inc.’s $10 billion plan to add LNG export capacity to the Sabine Pass import terminal in Louisiana in Dec. 2013. Scheduled to enter service in late 2015, this facility would be the first to send gas from the contiguous U.S. overseas. Close

Cheniere Energy Inc.’s $10 billion plan to add LNG export capacity to the Sabine Pass... Read More

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Source: Courtesy Cheniere Energy

Cheniere Energy Inc.’s $10 billion plan to add LNG export capacity to the Sabine Pass import terminal in Louisiana in Dec. 2013. Scheduled to enter service in late 2015, this facility would be the first to send gas from the contiguous U.S. overseas.

A rustic expanse of bayous and timberland stretches across DeSoto Parish, Louisiana. Home to sand bass, natural gas and Billy B’s Cajun Grill, DeSoto has a problem, and the solution may lie on the opposite side of the globe.

DeSoto’s largely agrarian economy has gotten hooked on profits from natural gas, and the region now faces the American fracker’s dilemma: a glut of supply and no one to sell it to. DeSoto sits on the Haynesville shale formation, the second-biggest natural gas field in the U.S. after the Marcellus. U.S. prices have tumbled so much since 2005 that some producers at Haynesville are pulling their rigs off natural gas altogether.

New customers are needed, and the Obama administration is looking to foreign buyers like Indonesia to boost demand. The U.S. Energy Department has approved six export projects and is considering a dozen more over the objections of industries that warn higher prices will reduce the competitive advantage of American manufacturing. By 2020, U.S. shale gas may account for 20 percent of the global market, according to a Citigroup estimate.

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“Exports, if they do nothing else, will stabilize prices enough to make it profitable for gas companies to continue drilling here,“ said Steven Brown, administrator of the DeSoto Parish Police Jury and the region’s top elected official. Natural gas output at the Haynesville shale formation tumbled 40 percent since 2011, stripping local governments of record tax revenues.

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In late 2015, cargoes of liquefied natural gas headed to fast-growing Asian countries will be propelling the U.S. into the ranks of global gas exporters such as Qatar and Australia for the first time.

Exports will help boost U.S. gas prices to about $5.50 per million British thermal units (BTUs) in the long term, said Anthony Yuen, a strategist at Citigroup Inc. in New York. Not everyone is happy about that.

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, arguing that price increases would harm domestic companies.

Natural gas futures for next-month delivery on the Nymex slumped to a decade-low $1.902 per million British thermal units in 2012 from a record high of $15.78 per million Btu in 2005. The crash in prices was driven by improved technology that led to booming production from shale formations, including the Haynesville.

Communities such as DeSoto have become victims of the energy industry’s success in extracting natural gas from deeply-buried rock. Companies are now shifting rigs to reservoirs richer in lucrative oil and gas liquids.

Following a two-year examination of the potential impact on domestic prices, the U.S. Energy Department is considering applications from companies seeking to export to countries that don’t have free-trade agreements with the U.S. Six proposals have already been approved, including Cheniere Energy Inc.’s $10 billion plan to add LNG export capacity to the Sabine Pass import terminal in Louisiana. That project, scheduled to enter service in late 2015, would be the first to send gas from the contiguous U.S. overseas.

Indonesia is ready to receive it. 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 will double from 2010 through 2035, according to estimates by the Asia Development Bank.

PT Pertamina, Indonesia’s state-owned oil and gas company, signed a 20-year contract in December to buy LNG from Houston-based Cheniere, which plans to build a second export terminal in Corpus Christi, Texas. The archipelago country, made up of more than 17,500 islands, is overhauling export terminals in Sumatra and Central Java to accept gas imports.

Cheap natural gas in the U.S. has been credited for helping ease the U.S. economy out of the worst recession since the Great Depression. The shale gas boom began just when the nation needed it.

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.

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, according to the U.S. Energy Information Administration, the Energy Department’s statistical arm. U.S. export terminals could ship the equivalent of 41 percent of last year’s total U.S. production, Energy Department data show.

The drop in gas prices has prompted companies including Chesapeake Energy Corp., 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.

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, EIA data show. Consumption has lagged, increasing 16 percent over the same period, mostly as a result 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 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.

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. plant in Texas that will produce ethylene, a plastics feedstock, has a planned 2017 in-service date. Taiwan’s Formosa Plastics Corp. is spending the same amount to expand an existing petrochemicals site in Texas, with start-up scheduled for 2016.

Natural gas vehicles haven’t increased total demand much, either. 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 to the American market, natural-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. Japan paid $16.49 per million Btu in November for an LNG cargo from Qatar, the world’s biggest exporter of the fuel, government data show. That’s almost four times the U.S. price for next-month delivery at the benchmark Henry Hub in Louisiana.

Gas from the U.S. will remain competitive with supplies from other countries, 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 to 10 billion cubic feet per 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 Feb. 5 phone interview.

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, said Charles Thomas, executive director of the Carthage Improvement Corporation and former city manager, in a Feb. 4 phone interview.

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

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