What do US LNG exports mean for NZ?

This is an abbreviated version of a recent article I wrote for NZ publication Energy News (www.energynews.co.nz).  I thought I'd make it available for those who don't subscribe or who may have not seen it.

What do US LNG exports mean for NZ?

Mark Blood - Fri, 20 May 2016

There has been much debate about the low oil price and Saudi Arabia’s continuation of its ‘go-it-alone‘ strategy of maximising production to drive out high-cost producers at the expense of the influence and indeed relevance of the once all powerful OPEC.

Saudi Arabia’s focus to cripple the oil production of US shale frackers has taken far longer than most oil analysts expected, although it now appears to be having some success.

That is reflected in the latest US rig count for May which showed 354 active rigs - an all-time low since records began in 1975.

However, less attention has been apportioned to the gas side of the of the US fracking equation and the impact on world liquefied natural gas (LNG) markets and pricing with the start of US LNG exports earlier this year.

At the IHS CERAWeek summit in Texas in February, US Energy Secretary Ernest Moniz said the emergence of the US as a gas superpower was a geopolitical earthquake that would herald a change in the energy security picture.

His comments relate to the first shipment of US LNG to Brazil in a historic move that has the potential to shift the balance of power in the global energy market and kicks off a struggle with Russia in Europe, and potentially Australia in South-east Asia, for market share.

The shift to net exports is something that almost nobody expected. Moniz predicted that the US will match Qatar, and possibly exceed it, to become the world's biggest exporter of LNG by 2020.

He said the world had been expecting the US to be a huge importer of LNG before the shale shock. The mere fact that this is no longer the case turns the market upside-down, and is a key reason why LNG prices have been in free-fall across the world.

At the very least, exports of US LNG are forecast to ramp up to almost 130 billion cubic metres a day by the end of the decade - roughly equal to Russia’s gas exports to Europe. That will impact global pricing and may lead to a global gas price war.

Impact on New Zealand exploration

So what does all this have to do with oil and gas exploration and production in New Zealand?

Irrespective of whether you think NZP&M’s strategy of promoting the country to large global players in the oil and gas industry makes good sense, the prospect of more LNG flooding the market must surely be a disincentive to new entrants to explore those frontier basins that NZP&M is promoting.

Geological evidence to date suggest the majority, if not all, of New Zealand’s sedimentary basins are gassy with varying amounts of liquids. The economics of exploring these basins will therefore, more than likely, be based on commercially viable conventional or floating LNG developments where the majority of the gas produced will be for export and will have to compete not only against Australian-produced LNG but also US LNG whose extraction costs are going to be lower.

Impact on LNG pricing

For the US the first cargoes of LNG come just as gas prices crumble. Over the past three years the price of LNG in Europe has dropped from USD $12 to USD $5.35 million Btu. In Asia it has dropped from USD $17 to USD $6 million Btu as Japan has restarted nuclear power plants after the 2011 Fukushima crisis; discounted Indonesian LNG is currently selling for USD $4.50 million Btu.

The surplus appears to undermine the economics behind the dash for LNG, at least for now.

Conclusion

Although US LNG exports will initially target European gas markets, as they ramp up they will invariably compete with Australian LNG in the Asia market. There has already been one shipment of US LNG to India.

And just as US shale oil has forced down global prices, LNG from shale is now doing the same to the gas markets. Numerous LNG projects around the world that were launched in the pre-shale era are now stalled or have been abandoned.

And that will make it tougher for New Zealand and those companies which  have licensed swathes of the Pegasus, Reinga, Great South and Canterbury Basins.

Unless a strong case can be made for a high liquids-to-gas ratio in a frontier exploration programme - there is some good evidence for this in the Canterbury Basin with the high liquids yield of the early Galleon and Clipper discoveries - or even oil, it is going to be even more economically challenging for existing and new operators to commit resources to explore basins outside of the Taranaki.