The shale revolution is a full reversal of energy fortunes in the United States. It might have similar potential in other parts of the world if as projected global LNG prices decline over the decade ahead and indexing gas prices to oil erodes from competitive pressures on existing oil-indexed LNG suppliers.
Large volumes of global gas supplies are expected come to market at prices below oil price parity (assuming oil prices at or above $90/bbl). Price spreads between regions are expected to narrow with more pipeline trade and LNG exports as suppliers compete to serve growing world gas demand. Growing LNG trade could decouple oil-gas indexation forcing gas exporters to discount LNG from oil-indexed high prices to retain market share.
The changing market fundamentals of growing supply and lower natural gas prices we see today were unthinkable less than a decade ago. From 2003 to 2009 natural gas prices across North America were at historic high levels. As market forces converge with high gas replacement costs and high crude oil prices created ‘crude sympathy’ in pricing between commodities.
Natural gas prices in the US got high enough to attract new investment, spur new innovative technologies, and with it new supply from shale and the growing global prospect of LNG in world markets changed everything. Now market participants in other world markets wonder if they can reverse their own fortunes too.
The pull of higher prices and growing global demand sets up changes in global LNG trade attracting supplier competition. This has the potential of turning markets on their head as buyers gain access to new supplies often at lower prices.
The US Energy Information Administration (EIA) increased its previous estimate of worldwide shale gas technically recoverable resources by 10%, to 7,300 Tcf in its 2013 Report: World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States. China, Argentina and Algeria are leading the list of resources; the US is 4th at 665 Tcf.
Figure 1: World Shale Gas Resources: An initial Assessment
SOURCE: US EIA 2013; http://www.eia.gov/analysis/studies/worldshalegas/
Who wins? Demand for energy resources is strongest in the faster growing markets in Asia, particularly China, and the Middle East. It makes sense that lower priced natural gas from shale growth in North America will seek higher priced markets in growing Asian economies. Panama Canal expansion facilitates US Gulf exports and Atlantic-Pacific LNG trade as canal tolls capture shipping cost savings inSouthern Cone transit.
US LNG exports begin by 2017 with Sabine Pass but the US will not be alone in exporting LNG to Asia attracted by its higher prices.
LNG demand is growing at about 2.6% per year. Actual LNG trade growth will depend upon market prices. Higher Asian prices will certainly create more competition. By 2017, Australia should be the largest exporter of LNG behind Qatar. North America, including the US and Canada, will be the next largest source.
Oil-indexed LNG suppliers’ prices should fall as supply grows. Current gas exporters are projected to discount LNG supplies from high oil-indexed prices to retain their market share. By 2017, large volumes of global supplies are expected at prices well below oil price parity (assuming oil prices at ~$90/bbl or higher). World liquefaction is projected to more than double, reaching 70 bcf/d in 2038. Beyond 2020, new LNG capacity is projected to be economic in a steady rise in LNG Trade.
As the shale gas revolution goes global, it still faces many challenges and results will be uneven. The challenges include environmental issues with hydraulic fracturing, land access, rule of law issues including lack of private property rights for mineral development, business climate in some countries, access to technology and experience, inadequate infrastructure and water.