Recent years have seen fundamental changes in the supply and competitive landscape of the North American natural gas market. In response to high natural gas prices that prevailed during most of...
The New Gas Wisdom
Unconventional gas sources put a ceiling on future prices.
non-industrial end-use sectors. Third, and most obviously, the current recession significantly will dampen gas-demand growth in the industrial, residential, and commercial sectors. That leaves the power-generation segment, which has doubled its share of total U.S. gas consumption to 30 percent over the past two decades. While there remains significant unused (combined-cycle and steam) gas-generation capacity across the country, we don’t foresee that gas prices even in the $5-$6/MMBtu range will lead to a massive increase in gas demand from existing units, particularly given the prospects of minimal or negative power demand growth in a recession, combined with plummeting coal prices.
Given the above, U.S. gas prices will remain de-linked from global LNG and thus crude oil prices. The netbacks for U.S. LNG imports need to match or exceed those for European or North Asian destinations in order to attract the marginal shipment of LNG. In regions of the world like Japan, where petroleum products based on >$70 crude oil are the next best option for generating an incremental Btu of heat or light, LNG landed at under $12/MMBtu representing an economically superior alternative for them. But with domestic unconventional natural gas available at $6/MMBtu or less, LNG prices would cease to pose a realistic option for the United States, and import parity pricing for U.S. natural gas would cease to hold. U.S. gas prices once again would march to the beat of their own drummer, as they have during earlier periods of gas-on-gas competition. Another potential impact of more abundant unconventional gas may be the effective diversion of natural gas in Alaska and Canada that long has been expected to flow south to the lower 48, to move instead to more lucrative markets overseas via LNG. The logic is the same as described above, in which the abundance of unconventional gas lowers netbacks of exports into the continental United States below those of Asian or European markets.
• Phase 2: LNG Redefined: The unexpected abundance of unconventional gas in North America, and possibly around the world, leads to a surplus of liquefaction capacity and thus the development of a significant spot market for LNG.
The discovery of massive unconventional natural gas reserves is not limited to North America. Australia, China, India, Southeast Asia, as well as parts Europe (UK, Poland, Italy, etc. ) all have anywhere from significant to massive unconventional reserves. Excluding Australia, significant production is several years out, and often blocked by murky rules around resource access and inadequate gas infrastructure to get the gas to market. What impact will all this new gas have on the LNG market? Very simply, one must wonder if the combined impacts on LNG supply and demand has the potential to push global liquefaction into surplus by some point in the next decade? The potential for additional volume from markets like Indonesia (Kalimantan and Sumatra) and Australia (Queensland), combined with decreased demand for LNG from gas-hungry and unconventional-rich countries—above all the United States, but importantly China and India as well— has the potential to strand a significant fraction of planned and existing liquefaction capacity.