Shale Fracking Makes U.S. Natural Gas Superpower. Now What?

09 26, 2012 by Bloomberg

Asian demand for natural gas has risen so sharply in recent years that Alaska wants to build a $50 billion pipeline and export terminal to move its stranded supply offshore. Exxon Mobil Corp., BP Plc and ConocoPhillips will deliver plans for such a project to Alaska Governor Sean Parnell by the end of this month.

Alaska has the only operating liquid natural gas (LNG) export plant in the United States. It’s an aging facility, capable of processing less than 10 percent of the volume of a new 3 billion cubic-feet-a-day terminal. The state’s hunger for revenues from its conventional gas is part of a larger unsolved question that the U.S. will have to tackle in the next few years: What will the nation do with its newfound abundance of natural gas, mostly from unconventional sources?

The question lurks just under the surface of the national energy conversation, which vacillates between exuberance that shale gas exists at all and fear that the method of extracting it -- fracking -- is polluting people's water. The high-pitched debates around fracking largely obscure another player: the rest of the world. It wants less expensive natural gas.

Gas is pricey in much of the world, particularly in energy-poor Japan and South Korea. This map shows why U.S. producers are so eager to construct U.S. export facilities. October prices, in dollars per million BTUs, could reach $13.50 in Argentina and $13.80 in Japan and South Korea -- but just $2.48 at the Lake Charles LNG import facility, in Louisiana. It's so inexpensive stateside because the U.S. supply is so great and because it's trapped in markets served by North America's pipeline network.

There's a simple reason for that disparity, one that will require considerable investment to overcome -- if the U.S. decides it wants to. Unlike oil, which flows on and off tankers, and coal, which fills up capesize transport vessels, natural gas just wants to be free. It’s lighter than air and wants nothing so much as to disperse into the atmosphere. Natural gas must be contained before it can be shipped.

It's a considerable undertaking.

First, a country has to develop gas fields, which the U.S. has done, and build hundreds of miles of pipelines to bring the gas to a port.

Second, it must build the massive port infrastructure to liquefy the gas, by lowering is temperature to about -260 degrees Fahrenheit. The Department of Energy has approved one new LNG export terminal, at Cheniere Energy Inc.'s existing import terminal in Cameron Parish, Louisiana. Nearly a dozen others are under DOE review. Just to give you a sense of how quickly this is all moving, less than 10 years ago the U.S. was expecting to build more import terminals.

Third, a fleet of specialized tankers must be called into service to transport the gas by sea.

Finally, the receiving side must re-gasify the fuel -- carefully! -- provided that it already has built the pipeline infrastructure to deliver it to customers.

How much should the U.S. spend on gas export infrastructure? If it sells its gas overseas, how much, for example, might future U.S. prices -- for U.S. gas -- rise as future South Korean prices fall? "That's what the big discussion is right now," said Andres Rojas, market analyst at Waterborne Energy Inc., the company that provides the Federal Energy Regulatory Commission with the map data. We spoke by phone late last month.

U.S. producers would like to sell gas in foreign ports, where they can ask a higher price. U.S. utilities, manufacturers, which use gas in an industrial feedstock, and residential and business consumers would like prices to stay low.

Policymakers and business leaders are trying to better understand the relationship between potential U.S. exports and prices at home before they make commitments to build new outbound gas liquefaction terminals. The U.S. Energy Information Administration reported in January that, according to its simulations, more exports would mean higher prices (pdf) for gas and electricity, and some fuel-switching back to coal-fired electricity generation.

A study (pdf) by Rice University's Baker Institute concluded in August that there's nothing to guarantee that the world market will always look as enticing for U.S. exports as it does now. Fluctuation in exchange rates, potential foreign gas discoveries and the global price effects from the U.S. increasing world supply could all change the picture in unpredictable ways, the report states, creating risk for exports.

For several years now, the U.S. has both celebrated and fretted over this newly accessible energy source. As the controversy over fracking is gradually resolved, the next question about gas will be, should it stay or should it go?

"As the story plays out," the Baker Institute study concludes, "the international gas market will evolve into something dramatically different from what it is today."