Gas Boom Means U.S. Exports Grow Fastest Rate Since ’70s

01 01, 2012 by Bloomberg

The natural gas glut that’s straining drillers is creating a bonanza for pipeline operators, spurring the biggest increase in exports to Mexico and Canada since the 1970s.

Kinder Morgan Energy Partners LP (KMP), the biggest U.S. pipeline company, and its rivals are planning to add 2.4 billion cubic feet a day of export capacity within three years, or enough gas to heat 32,000 U.S. homes. That’s a 58 percent increase on this year’s total, which in turn was up 34 percent from 2011.

As politicians debate the benefits of liquefied natural gas exports, which are carried in tankers, the pipeline industry is building lines to Canada and Mexico more quickly and cheaply, investing less than $2 billion for all six projects. The only fully permitted LNG export plant planned for the lower-48 states, by Cheniere Energy Inc. (LNG), won’t begin running until 2015 or 2016 and is budgeted at $5.6 billion for its first phase.

“It’s here, and it’s now, and we don’t have to wait,” said Bill Maloney, executive vice president for North American development at Statoil ASA, which plans to ship gas from Pennsylvania to Canada this year.

Mexican and Canadian demand is a bright spot for an industry that has underperformed in stock markets during the first three quarters of this year. The 10-member Bloomberg Natural Gas Pipeline & Storage Partnerships (BIPIPONC) index lost 4.5 percent in the period. The Standard & Poors 500 Oil & Gas Exploration & Production Index rose 2.2 percent, well below the over Standard & Poor’s 500 Index’s 13 percent gain.

Exporting to neighboring countries allows pipeline companies and gas producers to reach new markets without the risk of the LNG trade, said Judith Dwarkin, chief energy economist at ITG Investment Research in Calgary.
Net Exporter

U.S. gas production increased 25 percent in five years to 65.3 billion cubic feet a day feet a day in July, the latest month available, according to the Energy Department.

The country will be a net exporter in about a decade, according to the department’s data. Imports from Canada have fallen to 8.2 billion cubic feet a day this year, from 10.4 billion in 2007. Imports from Mexico have fallen to less than 1 million cubic feet a day this year, from 148 million cubic feet a day in 2007.

Exports last year were driven by a 49 percent jump in shipments to Mexico and a 26 percent increase in shipments to Canada, according to the department.

Shipping gas to Asia offers high premiums. LNG -- which is chilled to minus 260 degrees Fahrenheit (minus 162 Celsius) and loaded onto tankers -- averaged $17.06 per million British thermal units this year in Japan, more than six times the average U.S. gas price.
Building Plants

Plans to build LNG export plants in the U.S. have run into opposition from politicians, who worry that it will lead to price increases for U.S. consumers, and environmental groups opposed to wider gas development.

While demand in Canada and Mexico increases, the countries offer lower premiums than Asia.

Petroleos Mexicanos, the national oil company of Mexico, sold gas for about $3.34 per mmBtu in August, while the benchmark U.S. price averaged $2.82, according to data compiled by Bloomberg. Producers can generally earn 10 to 50 cents above the U.S. benchmark by selling to power plants and industrial customers in Mexico, Kenneth Medlock, an economist at Rice University’s Baker Energy Institute in Houston, said in an interview.

“The only way for Mexico to meet its growing natural gas demand is to import more LNG at prices way higher than prices of gas imports from the U.S.,” Anas Alhajji, chief economist at NGP Energy Capital Management LLC, in Irving, Texas, wrote in an e-mail.
Transporting Gas

In Canada, the high cost of transporting gas has created opportunities for U.S. producers. TransCanada Corp., which operates the nation’s only cross-country pipeline, charges about $2 per mmBtu to move gas from producing fields in Alberta to eastern provinces. That means Alberta gas, which averaged $3.122 in October, costs as much as $5.12 by the time it reaches Toronto and Montreal, about 2,000 miles (3,400 kilometers) away, Dwarkin said.

U.S. producers in Pennsylvania’s Marcellus Shale have plenty of cheap gas and are closer to Canada’s big markets, said Martin King, an analyst with FirstEnergy Capital Corp. in Calgary.

“They have some of the lowest finding costs on the continent,” King said in an interview. “Right now, it’s just a question of expanding your end-use market.”

Reversing Pipes

Spectra Energy, DTE Energy Co. (DTE) and Enbridge Inc. (ENB) are signing up shippers for a pipeline that would carry 1 billion cubic feet a day and run from Ohio to Ontario. The project would open in 2015 and cost as much as $1.5 billion, the companies said.

Meanwhile, National Fuel Gas Co. (NFG) plans to reverse an existing pipeline today so that it can move gas into Canada through Niagara Falls, New York, said Sandra James, a spokeswoman. Statoil ASA is the major shipper on the Northern Access Line, which cost $62 million to reverse and will be able to pipe as much as 320 million cubic feet a day to Canada.

Statoil has a contract with JPMorgan Chase & Co. to sell its gas in Toronto, Canada’s largest city.

“Canada has some of the strongest priced markets in North America,” James wrote.

About one-third of the planned exports will come from reversing or expanding existing border crossings.
Increasing Pressure

Kinder Morgan can boost its exports to Mexico on the Samalayuca pipeline near El Paso, Texas, by 236 million cubic feet a day simply by increasing the pressure at an existing compressor station, according to a regulatory filing. Kinder plans to add another 238 million cubic feet a day of cross- border capacity near Douglas, Arizona, by reconfiguring the compressors that serve its Willcox lateral pipelines, according to filings.

Kinder Morgan, based in Houston, also plans two new pipelines: a $4.9 million line that will add 366 million cubic feet a day of export capacity at El Paso and a 60-mile line from Tucson to the border town of Sasabe, Arizona, filings show. The Sasabe lateral will open in 2014 with a capacity of 210 million cubic feet a day and may expand to 760 million cubic feet, according to filings. Kinder Morgan Chairman and Chief Executive Officer Richard D. Kinder estimated the Sasabe lateral’s cost at more than $200 million.

The export projects not only provide a new outlet for gas to Mexico, they’ll help fill up unused capacity on Kinder’s interstate pipeline between Texas and California, the CEO said on an Oct. 17 conference call.
Pemex ‘Priorities’

“We believe we will end up with more than one lateral going down there,” Kinder said on the call.

Mexico will continue to import U.S. gas, as Pemex spends most of its capital searching for more profitable crude supplies, said David Shields, an independent energy analyst in Mexico City. Demand for gas has stressed Mexico’s 6,000-mile pipeline network and led to shortages in some parts of the country.

“I don’t see anything stopping it,” Shields said in an interview. “Pemex has 20 other priorities.”

In Canada, gas producers have asked the National Energy Board to reduce TransCanada’s tolls on its cross-country Mainline system. Even if the producers win, tolls will stay high enough to give U.S. companies an advantage in Eastern Canada, ITG’s Dwarkin said.

“It’s already a continental gas market,” Dwarkin said.