How Exporting LNG Could Bring Serious Wealth to the U.S.
Keith Schaefer, Editor
Oil & Gas Investments Bulletin
April 6th, 2012
Where will the wealth created by the fast growing Liquid Natural Gas (LNG) market be concentrated in the coming years?
In a word–Australia. It’s the #4 exporter of LNG in the world already, and seven new plants are in various stages of planning and development, which would require $200 billion in capital investment–and lots of jobs.
By comparison, America, which produces massive amounts of natural gas, sends a shockingly small amount of the resource abroad.
Both are close to markets – Australia is closer to Asia, which imports vast quantities of LNG, but the U.S. is also relatively close to these markets and closer to Europe, which holds some major LNG consumers, like Spain and France. Both also have robust natural gas production.
And yet Australia is light years ahead of America in sending LNG overseas. How far? about 800 billion cubic feet (bcf) per year.
Now before we explore that gap further, here’s a short-version background on LNG…
LNG is created by cooling natural gas to minus 256 degrees Fahrenheit, which transforms the gas into a liquid. This liquid has about 1/600th the volume of natural gas, making its transport over long distances much simpler —and much more economic.
While turning a gas into a liquid may seem to be the stuff of science fiction, it has its roots in the 19th century when Carl Von Linde, an engineer in Munich, built the first practical compressor refrigeration machine. The first LNG plant was built roughly a century ago in West Virginia.
Of course, large-scale users of natural gas prefer to deal with the regular kind–not liquid and frozen. Since gas is easier to move and doesn’t need to be refrigerated, companies had to then develop ways to reverse the process. So you have to liquefy the gas to move it, and then “re-gasify” the natural gas to use it. That’s a lot of work and means large infrastructure investments are required.
The gas is converted to liquid at liquefaction plants (LNG export terminals.) It is then transported in special ships that use auto-refrigeration. These LNG ocean tankers actually use a small amount of the LNG – 3%-4% during an average voyage—to power the ships. These tankers can carry around 135,000 cubic meters of liquid natural gas, which works out to about 3 billion cubic feet of warm natural gas.
To give you an idea of how much gas that is, 23 ships a day could feed ALL the US demand for natural gas. There are now roughly 375 ships in service worldwide.
The ships then go to an LNG import, or regasification, terminal where the LNG is converted back to a gaseous state and then either stored in tanks or sent through pipelines.
The Asian market is a major destination for LNG exporters. Japan is by far the world’s largest importer of LNG, bringing in nearly 71 million tons (8.52 bcf/d)—or almost 31 percent of all global LNG imports, according to Unit Economics.
South Korea is #2 at 34.5 million tons (4.14 bcf/d), or roughly 15 percent of global imports. Taiwan (11.3 million tons/1.36 bcf/d) and China (9.7 million tons/1.16 bcf/d) also account for a significant portion of LNG imports.
Asia isn’t the only major LNG import market, though. Europe brings in large amounts as well. Spain is the third largest importer of LNG with 27.3 million tons (3.28 bcf/d) coming in during 2010. The United Kingdom and France are also major importers, bringing in 13.4 million tons (1.60 bcf/d) and 10.2 million tons (1.22 bcf/d) in 2010, respectively.
According to the U.S. Energy Information Administration (EIA), the U.K. received 55 percent of its LNG exports from Qatar in 2009. That same year significant quantities of the hydrocarbon entered the U.K. from Trindad and Tobago (a surprisingly robust LNG exporter with 15.4 million tons (1.85 bcf/d) sent abroad in 2010), Algeria, Egypt and Australia.
Now that we’ve covered the basics of LNG, we can dive into the LNG industry in Australia to see what the U.S. might learn from the Land Down Under.
Australia only trails Qatar, Indonesia and Malaysia in LNG exports. In 2010, Australia sent 872 billion cubic feet (about 19 million tons) abroad, which was a substantial improvement over the 714 BCF exported in 2009, says the EIA.
That’s just over 8% of the world’s LNG exports. By comparison, Qatar does 25% of all LNG exports. Unit Economics states that Australia could contend with the Middle Eastern country for top spot as early as 2016.
Not surprisingly, most of Australia’s LNG exports go to the Top 4 importing countries—all in the Far East. Japan gets about 70% of Australia’s LNG exports, China gets 21%, South Korea 5% and Taiwan 4%.
There are only two LNG liquefaction plants in Australia right now, but seven additional export facilities are under construction, and four more are planned. Unit Economics reports that if all of these facilities come on line and produce their projected capacities, Australia will send a staggering 95.7 million tons (11.5 bcf/d) of natural gas abroad per year, versus the 19 million tons (2.28 bcf/d) it is exporting now—a five-fold increase!
The capital investments—and the jobs created by it—are enormous. The Australian major Santos Ltd., along with Petroliam Nasional Bhd., are planning on shelling out $45 billion to create three LNG export facilities that would be able to convert 20.8 million tons of coal seam gas into LNG each year, reports the Wall Street Journal.
Other prominent players in Australian LNG are the BG Group PLC and the Australia Pacific LNG consortium, which is led by ConocoPhillips and Origin Energy Ltd.
“LNG is simply in high demand. and it’s not just the consequence of Fukushima,” Jon Skule Storheill, chief executive officer of Awilco LNG, told Reuters, referencing the nuclear disaster in Japan that has prompted the country to rely more heavily on LNG. “There’s Korea, there’s Taiwan, this market is just strong. Gas is clean, it’s available and it’s cheap.”
America, on the other hand, has only two export terminals. The terminal in Kenai, Alaska, which was built in the 1960s, was idled in November of last year. (At the time, ConocoPhillips’ spokeswoman Natalie Lowman told The Associated Press the plant will be in preservation mode until spring 2012, at which time the company will re-examine the facility.)
The other is Cheniere Energy’s Sabine Pass LNG Terminal, near the border of Texas and Louisiana. This station has 4 billion cubic feet per day of capacity.
Overall, the US exported 0.2 bcf/d of LNG in 2011, according to the EIA—a total of 71.5 bcf. Australia almost does that in just one month. The U.S. sends most of its LNG exports to Brazil, China, Japan and South Korea.
So How Does the US Get In On the Global LNG Action?
The LNG market is growing, and its future looks bright.
Some industry analysts predict demand for LNG globally will increase 40% in the five-year period from 2010 to 2015. This would make the annual market for LNG roughly 300 million tons.
The U.S. has the fifth-highest amount of natural gas reserves in the world, with the EIA putting the number at 273 trillion cubic feet. By comparison Australia has the 12th-highest natural gas reserves, with “only” 110 trillion cubic feet. But, as stated above, Australia was able to ship more than 12 times as much LNG overseas in 2010 than the U.S.
The largest obstacle the U.S. faces in the LNG market is its lack of export/liquefaction terminals. With the Kenai facility going idle, the Sabine Pass terminal is the only facility in America even close to being able to regularly send LNG overseas. And even that could still be a few years away.
Now what about building LNG liquefaction plants? Unit Economics says it can cost $3 billion for each million tons of annual capacity for the entire liquefaction supply chain, which includes production, pipelines, the port and the facility itself.
The Wall Street Journal reports there are seven additional projects seeking approval from the Department of Energy to ship LNG to most foreign nations. If all of these projects gain approval they could handle about 25 percent of U.S. gas production. However, the news source reports that approval for all of the facilities is unlikely.
An additional hurdle to the LNG market in the U.S. is political opposition to sending the energy source overseas. The American Chemistry Council has warned the U.S. government that it “should not undermine the availability of domestic natural gas,” but is not necessarily against exporting the substance.
The Sierra Club is concerned that exporting more natural gas will cause companies to increase their fracking operations. While there has been little to no evidence that fracking itself harms the environment, a groundswell of opposition to the practice has emerged, making investing in greater production difficult for the industry.
Still, for all the hurdles in exporting LNG, the U.S. also many opportunities.
In mid-March Japanese officials planned to meet with a delegation headed by Deputy Energy Secretary Daniel Poneman to reportedly request LNG exports to Japan. This appears to be a major step, as Japan had previously shied away from American LNG due to uncertainty over whether Washington would allow it to be exported.
As mentioned, Japan’s thirst for LNG is insatiable, and it will only grow stronger as the country scales back on its use of nuclear power following last year’s Fukushima Daiichi nuclear disaster. (Before the disaster, nuclear power accounted for about 30 percent of Japan’s energy production. That’s a large hole Japan will need to fill.)
Other markets that could be exploited by the U.S. are the U.K., France and Spain, all three of which are among the largest importers of LNG in the world. While Australia does send some LNG to these European countries, most of the U.S. competition will come from African countries like Nigeria and Algeria, as well as Qatar.
Another positive sign for U.S. LNG exports is that they appear to have the support of Energy Secretary Steven Chu, who has stated that sending the hydrocarbon overseas would allow America to cut into its trade deficit.
“Exporting natural gas means wealth comes into the United States,” he said, reports The Wall Street Journal.
There is much work to be done in the U.S. LNG industry to help it catch Australia—but the economics are powerful if it can. The gears appear to be moving in the right direction, as both international markets are opening up, domestic production increases and LNG liquefaction facilities gain approval and come on line.
The service we endeavor to provide is to analyze and clarify the nature and potential of certain North American junior oil and gas producers, and identify those situations where the market either misunderstands the nature of the company or assigns unduly optimistic or pessimistic success odds to the company. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions on his research, and will state in each instance the shares held by him in each company.
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