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2017-05-12 / News

Expanding the market for Marcellus and Utica LNG

By r. brock pronko
Regional Business Analyst

Next year, the U.S. is expected to become a net exporter of natural gas on an average annual basis, according to the recently released Annual Energy Outlook 2017 by the U.S. Energy Information Administration (EIA). The transition to net exporter is being driven by declining pipeline imports, growing pipeline exports, and increasing exports of liquefied natural gas (LNG). LNG demand is expected to increase 50 percent by 2020.

LNG is natural gas that has been converted to liquid form by cooling it to about -260 degrees Fahrenheit. Since LNG takes up 1/600th the volume of natural gas in the gaseous state, it’s easier to store and transport.

To delve deeper into LNG exports and assess its impact on the natural gas industry in the Marcellus and Utica gas shale regions, Marcellus Business Central spoke to Victoria Zaretskaya, the lead operations research analyst at EIA.

Marcellus Business Central: What role is Marcellus and Utica gas playing in the export of liquid natural gas, and has this new market impacted regional gas prices?

Zaretskaya: It’s playing a key role, which will become even more important as new takeaway capacity comes online in the Appalachian region. Some of the gas from the Marcellus and Utica shales is being shipped west to Chicago and other cities in the Midwest and some is going to the Southeast as far down as Georgia and Florida. Appalachian gas is being shipped south where it’s competing head to head with gas from the Gulf of Mexico, Texas and Oklahoma.

We’re beginning to see this new competition between gas produced in the Northeast and gas produced in the Gulf and in the West which is creating a downward pressure on Henry Hub prices. Marcellus gas will directly supply the new LNG export facility at Cove Point, Maryland, which is scheduled to begin shipping LNG early next year. Some LNG export facilities in the Gulf of Mexico will also be using Appalachian gas as more takeaway capacity around Utica and Marcellus shales comes online in the next few years.

This new utilization is improving the price of natural gas in the Northeast markets, which had been very low, under $1 per million British Thermal Unit (Btu). Appalachian gas has now become more competitively priced due to it no longer being locked in the Northeast immediately around the Marcellus and Utica so it can be shipped to high demand markets around the country. This is good news for the Appalachian gas producers and for the economies of Pennsylvania and Ohio, which had been hurt by the downturn in oil and gas industry.

MBC: LNG export breakeven points are tied to worldwide oil prices, which have depressed for the past three years. Given this situation and the high cost of constructing LNG export facilities, how can U.S. LNG exporters such as Dominion and Cheniere turn a profit?

Zaretskaya: On the surface, it looks like U.S. LNG is not breaking even under the assumption of oil prices based on a range of calculations that analysts have made. Some LNG experts put the breakeven point for LNG at $70 per barrel of oil, some at $60 per barrel, and others as low as $55 per barrel. We currently don’t have oil prices in those ranges to support the expert’s breakeven price analysis, yet we are seeing a healthy level of U.S. LNG exports. That’s because exporters keep finding more and more markets for LNG. Five new LNG markets have opened recently and 10 more could open in the next decade. There are new markets opening in Europe, India, China, Japan, Turkey, and smaller markets such as Jamaica, which came online last year. This expansion of LNG has been enabled by floating storage units (FSRUs), which can be equipped in two ways: as a separate unit aboard the LNG carrier itself or an old LNG carrier can be converted into an independent unit and placed offshore to receive LNG shipments.

Turkey had two land-based FSRUs and deployed another FSRU a couple months ago, and then started importing LNG. We see that LNG export markets are growing incrementally, and that’s enough to keep the demand for U.S. LNG strong. It’s also created a competitive spot market for U.S. LNG to thrive, and the sport market is not as dependent on correlations to oil prices.

Sabine Pass in Louisiana was the first LNG export facility to ship LNG abroad, and it operates on the spot market, meaning that it meets demand as the need for LNG becomes available. On the other hand, Cove Point has long-term contracts with clients in India and Japan. There are currently seven LNG export facilities approved by FERC and under construction and another four approved. With each U.S. LNG export facility that goes online, the U.S. is in a better position to supply steady shipments of LNG to established customers and to meet demand as needed in the spot market.

MBC: What factors are driving the demand for LNG abroad?

Zaretskaya: The global economy seems to be on the upswing, and natural gas is a bridge fuel. It’s the intermediate step toward the clean energy future filled with renewables and many countries are implementing more stringent environmental regulations where they look at natural gas as a bridge fuel. Natural gas abroad is used for power generation, for big factories’ combined cycle facilities, and it’s also increasingly used around the world as a backup fuel for renewables, which have an intermittent dispatch profile.

If the wind doesn’t blow or the sun doesn’t shine for 24 hours, you need to have a backup source of energy so you can supply electricity regardless of the output from your renewables. In many countries, having backup gas fired generators is becoming part of legislative framework for power generation to support renewables development.

We see the move to renewables around the world, which is being driven by reduced costs in solar and wind. You can purchase and install solar panels in China or any other country in Asia at a relatively competitive cost, but to run your electric grid in a reliable manner, you need to have those gas generators, so gas-fired plants are becoming the backbone of many country’s electricity needs and will continue to be until energy storage ability has advanced to where renewables can be used independently. .

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