A fracking solution.
Last week I discussed the changing fortunes of shale oil production in the US in the light of the precipitous decline in oil prices by nearly 60 per cent since June 2014.As the energy construction boom winds down, policy makers must get the settings right to prepare for future investment, while energy players mull the best way to allocate scarce capital.
Officials with area LNG companies, an economist and a local economic development leader disagree with a Bloomberg Business news report that only five of the 90 LNG export projects planned around the world will be needed.In response to Kinder Morgan’s Oct. 4 op-ed commentary entitled “Rules followed, care exercised in meeting region’s gas needs,” there are many substantiated studies that have been done in this past year which verify just the opposite. The International Energy Agency (IEA) in its September “Oil Market Report” said “US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mbd next year” and “oil’s rout extends a slump in drilling and completion rates”. The start of production at some of the state’s enormous new LNG projects is tantalisingly close, although myriad delays and cost blowouts, and a low oil price, have raised doubts over the potential for new developments. As we approach the juicy middle of President Vladimir Putin’s third term, Russia is extending, and fighting for, its interests in nearly every corner of the globe.
However, even bigger shockwaves could be felt in the natural gas sector, should economic sanctions restricting the Persian Gulf powerhouse be fully lifted. John Hickenlooper expressed his support for the Jordan Cove Energy Project, he joined the Grand Junction Economic Partnership, Grand Junction Area Chamber of Commerce, and West Slope Colorado Oil and Gas Association in citing the potential economic benefits of the project to western Colorado. The state’s largest project, Chevron’s Gorgon, is already a year behind schedule and has recently been hit by the threat of industrial action, prompting industry leaders to call for change to the employment relations framework.
The coal sector has suffered from downbeat analyst outlooks this year as some producers attempt to sell their coal assets, and recent data shows that the U.S. used more natural gas than coal to generate electricity in July. Tehran’s reintroduction to the international community would fire the starting pistol on a natural gas race that could have profound long-term implications for international oil companies such as Royal Dutch Shell, which have ploughed billions of dollars into developing higher-cost gas projects in areas such as Australia. It said the demand for liquefied natural gas will be hurt because of “weakening Asia economies, cheap coal, the return of nuclear power in Japan and the ever-expanding glut of shale supply in North America.” Chas Roemer, president of the development company Roemer, Robinson, Melville & Co., said he disagrees with the firm’s statement.
Australia’s high-cost environment is concerning the industry, too, with reports that some projects are struggling to deal with the current LNG spot price. Iran shares access to the world’s single largest natural gas field with Qatar but has so far been unable to fully develop its share of this vast resource. To the contrary; Attorney General Maura Healey stated on Sept. 19. “The very facts surrounding the need for additional gas capacity are highly disputed (and) the risks assumed by the electric ratepayers would be significant, because the volatility of natural gas pricing is well known.” Additionally, Massachusetts currently has under-utilized storage facilities. The availability of so much gas — an environmentally desirable fuel — caused a crash in prices in spite of equally rising demand, which was fuelled by a switch away from coal for power generation and a significant expansion in the petrochemical industry.
In 1999 Berkshire Gas added a permanent Liquid Natural Gas storage facility to its system in Whately, It was comprised of two 70,000-gallon LNG tanks with space for three more LNG tanks. Yet, production kept rising because drillers were after the more lucrative oil and condensate production when their prices were higher, between 2010 and 2014, and sufficient enough to support the shale gas production. Cross border trade exceeded $31 billion – good for sixth among Russia’s major trading partners – and U.S. and EU sanctions have expanded the horizons for further trade between the two nations. But “as much as I enjoy seeing natural-gas demand increase, coal needs to be part of the energy equation,” he said. “We are competitors, but each fuel can benefit the other.” The Energy Information Administration expects total coal consumption this year to fall by 8%, mainly because of a drop in electric power-sector consumption. Prior to the imposition of tougher economic sanctions on Iran, the country had made progress in tapping into South Pars, which had been broken down into 24 phases of development.
Berkshire Gas had originally planned to add these three additional tanks to alleviate pressure, capacity and peaking issues, scheduled for 2003, 2011 and 2018, with the installation taking place as needed to meet projected gas send-out requirements. Last year, Carnarvon Petroleum made one of the largest offshore discoveries in the state for some decades, while AWE made a big onshore discovery in the Perth Basin. The company’s $20 billion Sabine Pass LNG export facility in Cameron Parish includes six trains that will be able to export 4 billion cubic feet of LNG per day.
Why does Berkshire Gas ignore this possible local capacity upgrade which could maintain adequate operating pressures during peak or near peak periods and instead declare a moratorium on any new gas service in Hampshire county towns Deerfield, Greenfield, Montague and Whately, itself? It would be hard not to support lifting the ban considering the groundswell of support Colorado’s congressional delegation has from constituents on this issue. It will be surpassed by Chevron, which at the completion of the Gorgon and Wheatstone projects will account for more than 15mtpa, and Shell, which holds the lion’s share of Prelude and a big chunk of Gorgon (see graphic). Gas exports from Russia are up some 34 percent since 2010, and Turkey – now Russia’s second largest market after Germany – is only getting hungrier.
However, many of these deals were cancelled, setting back Iran’s gas industry by decades as its big rival Qatar pressed ahead with its own developments on the other side of the Gulf. Cargo is expected to go to worldwide markets by January. “It’s all going to be built; the economic benefits are locked in,” French said. “This piece of U.S.
In fact, The Department of Energy recently determined that nationally, from 1998 to 2013, 46 percent of existing pipeline capacity went unused and points out that higher use of existing capacity is more cost effective than building new pipelines . Earlier this month, Vital for Colorado, a broad coalition of business, civic and economic development leaders, along with thousands of Coloradans from across the state dedicated to supporting and promoting the benefits of energy production in Colorado, joined with nearly 100 economic development groups, businesses and elected officials from every region of Colorado in expressing their support of lifting the oil export ban.
Three global players are joining the local LNG market, with US company ExxonMobil, French player Total, and Japan’s Inpex making their first forays into WA. Last spring in the ISO Net Energy Load Report it was stated that electricity usage in all of New England is going down compared to the same month a year ago at the rate of 1.2 percent a year.
Inpex, notably, has a share of the ConocoPhillips-run Darwin LNG, however, that is not included in the numbers because the field is located off the Northern Territory. With European demand projected to grow by just over 1 bcm per year in the same period, Russia’s South Stream pipeline proposal was as misguided as it was non-compliant with the EU’s Third Energy Package. The company has said it could miss its latest target for a shipment before the end of this year, pushing out the timeline to 2016, while it struggles to complete commissioning of its first LNG train. Shale oil has proved to be a large new resource, and for the first time in its history, the US has in effect become the ‘swing producer’ of oil with the potential to affect world prices. With the project almost finished, it was in a vulnerable position for labour negotiations and, led by three major unions, workers voted in August to take strike action to force a change in rosters.
Turkey gets its gas and partly fulfills its transit aspirations; Russia bypasses Ukraine while opening windows to Europe and the Middle East; and Europe, if it wants it, will have gas on demand. All of this and the fact that new solar arrays are being designed and installed at a rapid pace all throughout the Northeast does not add up to a “critical gas need.” The Northeast Energy Direct pipeline would be moving gas to be exported from the Goldboro LNG project in Nova Scotia over to Europe for greater profit. But the Europe-wide ban on fracking for shale gas puts them “at the mercy of getting natural gas from the U.S.” He said Russia bases its natural gas prices on the price of oil.
Qatar is already predicted to see its income from LNG exports fall over the next decade as output has peaked and global markets become flooded with the fuel source. Australian Petroleum Production and Exploration Association chief operating officer (western region) Stedman Ellis said a study by consultants McKinsey & Co had found Australian LNG projects cost up to 30 per cent more than those in Canada. The moratorium on development of the North Field pushed international oil majors into developing more expensive projects in deep waters close to Australia. He mentioned Leucadia’s decision last year to back out of its $2.6 billion project in Lake Charles. “It’s one thing to announce that you’re planning to build this plant,” he said. “It’s another thing after you’ve starting building machinery.”
As it stands, the parties have agreed to draft the text of an intergovernmental agreement, with a targeted signing date of early next year, following Turkey’s general election. Coal is also among the assets produced by Glencore PLC GLEN, +13.27% which has been suffering under the strain of staggering debts on the back of the wider slump in commodity prices. The IHS report shows the following benefits: $746 billion in additional economic investment and an average increase in domestic production of 1.2 million barrels per day; $265 billion in overall savings for consumers, translating into as much as $391 in annual household savings; and an average decrease of eight cents per gallon in the cost of gasoline. EIA is forecasting an increase in US marketed natural gas production by 4.2- and 1.5-bcf a day in 2015 and 2016 respectively without attributing the increase to shale gas or to conventional gas. Expanding the power of the environmental regulator Nopsema (the National Offshore Petroleum Safety and Environmental Management Authority) into state waters, in place of existing bureaucracies, would be a logical step, he said.
Many of Qatar’s LNG projects were originally aimed to supply the US market before the North American shale revolution reduced the country’s need for foreign imports from the Middle East. This state’s projects, according to Wood Mackenzie lead WA analyst Saul Kavonic, break-even at around $US12.50 to $US17 per million British thermal units. Gazprom conceded a 10.25 percent gas discount in February, but Turkey would like to see that figure reach 15 percent by the time TurkStream makes its first deliveries.
That echoes the IEA report, which shows the capital cost for Ichthys more than twice that of US shale play Sabine Pass, although Australia has a substantial transport advantage. That might mean increased infrastructure sharing and collaboration, of the kind flagged by the North West Shelf Venture and Hess for processing of Equus gas last year. Matthew Wolfer, an analyst at Boston-based Saibus Research, pointed out that “because of geography and delivery-ability…and current capacity, it is very hard to see coal’s share of total U.S. electricity generation going below around 30% over the course of the next 10 years.” Most coal plants are several decades old so their capital costs are low, he said, suggesting that paying operational costs for an already existing coal plant could be much more appealing to a utility company than paying to have a new natural-gas plant built. Analysts suggest that lifting those curbs would make little economic difference to domestic oil producers, but could prolong the slump in global oil prices. The New York Stock Exchange-listed giant earlier this year reported earnings in the second quarter had fallen almost 90 per cent from the same time last year.
Both Woodside and Chevron recently signed big data deals, with Accenture and GE Oil & Gas respectively, which they hope will reduce costs and improve maintenance efficiency. Even if partners can be found once sanctions are lifted, it would take at least five years to build the infrastructure that would be required for Iran to export LNG on a global scale. Maintenance company IAS Group business development manager Mike Davis said operators in the energy sector had been tightening up and reviewing service contracts. Nord Stream-2, another Gazprom project, which has the backing of Shell and Wintershall among others, looks to provide an additional 55 bcm of capacity beneath the Baltic Sea. However, Iranian gas would have the advantage of being relatively cheap to produce and export when compared with the highly expensive deep-water projects in Australia.
In other words nobody really knows, except that low oil prices are here to stay, as global supply and demand coming into balance continues to get pushed further into the future. But Mr Davis said that provided opportunities for innovative businesses, for example using composite repairs, rather than full replacement of equipment. Carnarvon chief executive Adrian Cook said production was still about three years off, with 22,000 square kilometres to be surveyed and 10 wells to drill. “(The find) sort of set everything alight, and then (there was) the realisation that we had a lot of work ahead of us,” Mr Cook told Business News.
Immediately on the agenda will be a neighbouring well in shallower water on the next geological structure, with the partnership eventually looking at exporting using a floating platform. “We’re starting to see some interesting assets being put on the market … the oil price actually staying low suits us at this point in time,” he said. The promise of low-cost, reliable natural gas supplies, with prices staying below $5 per mmBTU, and environmental factors, have spurred major investments by all end-users. It marks a major change in strategy for Carnarvon, Mr Cook explained, which three years ago had an eclectic portfolio including production in Thailand. “In a hot market you can get away with (a diverse portfolio), in a tough market, you’ve got to ask, where’s your point of advantage?” Mr Cook said.
If Iran does open up – and provoke Qatar to lift its moratorium in response – then LNG prices will fall even further, despite forecasts that demand will increase by 5pc annually through to 2025. Russia’s air offensive – viewed principally as a veiled attempt to support Syrian President Bashar Al-Assad – was never going to win over Turkey, who supports the uprising, but extracurricular activities in Turkish airspace have brought the once promising relationship to a standstill.
Commercially – and barring any direct conflict, which remains unlikely – the Turkish gambit may still bear fruit, but politically, Putin failed to bring Turkey into his fold, an opportunity that now appears lost. It costs about $2-4 per mmBTU to liquefy gas and another $3 to take it from the US to Asia and $0.5 to regasify, on top of the $4 Henry Hub natural gas cost.
But in the longer term, once demand and prices recover, it is likely that US LNG will be sought after because it is a reliable source of supply regulated by a stable government. In Europe purchases of LNG went down for a third month in August as buyers boosted purchases of oil-linked gas through pipelines from Russia, as a result of the reduction in price, down to $6.2 per mmBTU. CNG exports might be viable within that range, if Cyprus were to act now and secure gas sales contracts before the southeast EU gas markets become saturated.