Natural gas supplies have risen sharply following an industry boom. It’s all about shale formations: previously considered too tight for hydrocarbon extraction, new technology has proven to be a smashing success. Demand for natural gas has risen also, as consumers choose it over other energy sources and economic growth creeps upward.
Yet, the growth in supplies is far outpacing the growth in demand and this is creating significant downward pressure on prices. The unit price of gas has tumbled from the $8 level it held in 2008 when the shale gas boom got underway. It fell to$5.50 in 2010 and has continued its decline to about $2.50 during early 2012.
US shale gas plays and basins. (click to enlarge)
Consequently, the law of supply and demand has kicked in as the sector’s economics play out. Producers don’t make money if prices go too low, so drilling and exploration activity slow down. Some U.S. companies are cutting production and the count of new active rigs drilling for natural gas has fallen about 50% from 2008.
But a recent change in Japanese energy policy is now shifting the market. Following the disastrous meltdown at the Fukushima Daiichi nuclear plant after it was hit by a tsunami, other Japanese reactors that went offline for scheduled maintenance have stayed offline.
Japan’s consortium of electrical generation utilities reports that their LNG purchases in January jumped 39.2% year-on-year, reaching 5.23 million tones—a new high. Furthermore, Tokyo’s municipal government is moving forward with plans to build its own LNG-fueled electrical generation plant, a massive one-gigawatt facility, to shore up local supplies.
LNG terminal in Japan.
The price of imported LNG in Japan is around $16.25 per MMbtu, up from $11.45 one year ago. With U.S. prices around $2.50MMbtu, the price differential promises solid net profit per unit gas export.
Indonesia is another potential Asian market for U.S. exporters. The nation has a chronic shortage of natural gas supply. The national power utility PT PLN is forced to generate electricity using oil; it is much more expensive and is busting the government budget.
Although PT PLN has shifted its strategic energy mix to emphasize natural gas, the company has not yet secured a contract with U.S. producers but has shown strong interest in doing so. Even the Indonesian state oil & gas firm PT Pertamina is interested in LNG supplies from the U.S. because it is mandated by the government to shift away from using subsidized oil and to use natural-gas-based transportation instead.
Beijing smog.
China is another potential gas market and its fast-growing population and economy has impacted global energy markets. Until recently, the Chinese government has depended largely on coal which constitutes roughly 70% of its energy mix. However, these coal-burning activities have lead to severe air pollution in major cities in China. Air monitors in Beijing reported on several occasions that the reading reached over 500 micrograms per cubic meter. (A reading between 300 and 500 is considered hazardous.)
During the last month, thousuands of travlers at Beijing Capital Airport were delayed by the almost-opaque air around the capital city. Even though the Chinese government denied that it was smog (pollution) and says that it was a naturally occuring fog, the government has informally acknowledged the problem by quietly shifting its strategy to emphasize clean energy sources including natural gas.
The challenge of the Chinese market is its infamously low gas price. But this can be offset by the fact that the Chinese natural gas market is so large. The International Energy Agency noted that China accounts for one-third of all growth in global demand for natural gas and it is the fourth-largest gas consumer in the world. Russia’s Gazprom has been vying to tap this large natural gas market in China.
The U.S. seems to be preparing to harness this untapped international market. Last year, the Department of Energy granted a permit to export domestic natural gas from a LNG terminal in Louisiana to countries that the U.S. has free trade agreements with for gas. The department is also considering whether to allow exports to counties not covered by the pacts. Even though direct export to the global market will require huge up-front capital investments in gas transport infrastructure development, both the potential profit due to the wide gap in market prices and the sheer volume of demand make the economics look very attractive.
There is large untapped potential in the international natural gas market. With the right international gas marketing strategy, the U.S. shale gas boom may be just getting started.
By Darmawan Prasodjo PhD, Petronomist – Chief Editor and Economist. Dr. Prasodjo is an economist who specializes in environment, energy policy, modeling, markets, and global energy strategy.
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