OUTLOOK ’13: Projects to export LNG has US manufacturers rankled

04 January 2013 18:30  [Source: ICIS news]

HOUSTON (ICIS)--The US natural gas market could see its historically-high inventories gradually work down in 2013, as gas-directed production has curtailed during the last year and consumption has remained modest.

Beyond the domestic gas market, large-scale commercial proposals to export natural gas as liquefied natural gas (LNG) has stirred controversy among North American chemical manufacturers, particularly with US major Dow Chemical, which cite the need to protect resources for use within the US borders.

Analysts and businesses are questioning whether sufficient shale resources can serve both rising petrochemical demand, particularly with the development of planned ethane crackers, and US LNG export projects. The supply estimates remain at stake as the US government determines how to shape policy to meet both needs.

Price predictions

UK-based investment bank Barclays views forward gas prices for the shoulder season, or when inventory begins to build, at above $4.00/MMBtu, given that colder weather expectations should give support to rising prices.

Up until December 2012, the overall lacklustre winter demand had kept prices at an average of $3.20/MMBtu for the front-month of the US natural gas futures Henry Hub benchmark on the New York Mercantile Exchange.

While there is a boom for petrochemical manufacturers seeking to capitalise on cheaper feedstock, the sluggish natural gas price is less appetizing for natural gas producers, which have curbed back on the number of gas-directed drills.

The US-based oil and gas services provider Baker Hughes estimated in its rig survey on 14 December that US natural gas drilling rigs totaled 416 units, nearly half of gas rigs operating the same time a year earlier.

BNP Paribas analyst Teri Viswanath said in a recent presentation that the general economic outlook was not likely to present immediate demand growth either.

“We see a sluggish recovery ahead, given the relative stability in domestic production and limited prospect in demand growth,” according to BNP Paribas. “In our view, the slow ebb of inventories will forestall a more significant recovery in prices next year.”

BNP Paribas estimates working gas in storage could draw down to 1.85 trillion cubic feet, or about 52.4 billion cubic metres (Gm3), by the end of March. This compares to slightly lower than the US Energy Information Administration's (EIA) end of winter projection of 1.9tcf.

Growing LNG export plans

The beginning of 2013 is expected to bring about heightened debate on the US Department of Energy’s (DOE) approvals on pending LNG export projects.

Seventeen LNG projects are awaiting the green light on export licenses to non-free trade agreement (FTA) nations, which require DOE approval.

Most LNG analysts expect as many as four to five projects to be commercially feasible.

The agency gives automatic approval for companies to sell to free trade agreement countries, which now includes South Korea, but a majority of major consumers of LNG globally are categorised as non-FTA, such as Japan and China.

George Biltz, Dow Chemical’s vice president of energy and climate change, said that the chemical manufacturer is in favour of allowing LNG exports and supports free trade but wants to ensure that natural gas prices will not spike as a result of unchecked LNG exports.

“To do this properly, you need a very accurate supply/demand balance, and you need to take into the value added and need to understand the pricing that will accrue,” he said.

Dow Chemical has advocated for greater scrutiny in approving the pending LNG export projects, including providing a better macroeconomic impact assessment on domestic gas prices.

At the US DOE’s request, the US EIA published a report last January on various price scenarios, factoring in the pace of development with US shale basins. On 11 November, the second part of the request, a study published by US-based consulting firm NERA Economic Consulting released its report on the macroeconomic effects of potential increased LNG exports.

After the release of the study, Biltz criticised the NERA report, stating that the consultants used out-of-date figures for their analysis and underestimated manufacturing demand. Biltz said Dow Chemical estimates pegged growing consumption from downstream projects could total as much as 6 billion cubic feet (bcf)/day.

“It’s a huge opportunity from a manufacturing renaissance,” he said.


By: Ruth Liao
+1 713 525 2637

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