A new connection

The North American natural gas market continues to experience rapid fundamental change as the continent gets set to deliver surplus gas in the form of LNG to the global market within the next two years – a situation that, until recently, few believed would occur.

In 2008, a ‘technological breakthrough’ was taking place that would transform the gas industry. Through a combination of horizontal drilling and hydraulic fracturing, existing technologies were brought together with dramatic results that markedly increased previous drilling and production efficiencies, reduced costs, and, in the end, brought substantial new volumes of natural gas from ‘unconventional’ supply sources to the market.

US natural gas

The importance of the shale gas revolution in the US to the transformation of the North American gas industry would be difficult to overestimate. Shale gas resources are almost totally behind the large increases in recoverable natural gas resource estimates (as well as the increases in actual production). Not only have entirely new gas resource plays been discovered and subsequently brought into production, but the resource estimates of those active plays have generally ended up being raised in an ongoing series of resource reassessments. Estimates for the Marcellus play, for example, have risen from 50 trillion ft³ in 2008 to 369 trillion ft³ in June 2013, as Marcellus production has increased from virtually nothing to over 10 billion ft³/d (at the wellhead) in the same period. By the end of 2013, Marcellus wellhead production actually exceeded 12 billion ft³/d, constituting 17% of US Lower 48 wellhead production in a span of only five years.

For the US as a whole, the natural gas resource estimate released by the Potential Gas Committee (PGC) in April 2013 put total US recoverable gas resources at 2689 trillion ft³, up 24% from 2170 trillion ft³ in its April 2011 release. At the US 2013 demand level of 26 trillion ft³, that is enough natural gas to meet demand for over 100 years. Notably, the PGC’s shale gas estimate increased a full 50% (from 687 trillion ft³ to 1073 trillion ft³), while its non-shale resource estimate only increased by 9% (from 1484 trillion ft³ to 1616 trillion ft³). The most recent estimate of US shale gas recoverable resources adopted by the US Federal Government is slightly higher at 1161 trillion ft³.

Not surprisingly, the resource reassessments have impacted commodity prices. The annual average spot price in the US national market measured at Henry Hub was up 35% in 2013 to US$ 3.73/million Btu compared to US$ 2.75/million Btu on the same basis in 2012. This, it might be pointed out, was still 7% below annual prices in 2011 that averaged US$ 4/million Btu. To put current US gas prices in perspective, however, US$ 3.73 is 58% below the average annual spot price in 2008 of US$ 8.86/million Btu (before the shale revolution).

US LNG export developments

There has been significant recent activity at the US Department of Energy’s (DOE) Office of Fossil Fuels. The DOE has now issued non-FTA LNG export authorisations for approximately 8.5 billion ft³/d in aggregate.*

Remaining non-FTA LNG export applications total about 26 billion ft³/d from almost 20 projects, with 11.6 billion ft³/d having been filed in 2013 by eight projects. This is a remarkably high number and the DOE has created an ‘order of precedence’ for its review of the applications. This is essentially the order of filing for the respective DOE applications (provided that a project had received approval from the Federal Energy Regulatory Commission (FERC) to utilise the FERC’s pre-filing process for site approval by 5 December 2012).

With respect to the ultimate level of LNG export capacity that is likely to be built in North America, and regardless of the volumes ultimately permitted by the DOE, US exports will likely be in the 8 - 10 billion ft³/d range, much less than the total application volumes or possibly even the volumes ultimately given approval by the DOE.

Canadian natural gas resources

Canadian gas resource estimates have also shown large increases. A key recent component of this increase is the new estimate of gas resources for the Montney formation in Alberta and British Columbia (B.C.). A November 2013 joint report increased the estimate of recoverable natural gas in the formation from 108 trillion ft³ to 449 trillion ft³. The report’s website noted that this alone would leave the revised Montney formation able to meet Canadian demand for 145 years.

Other estimates of shale gas resources have been similarly supportive of a vastly increased resource in Canada. An EIA report released in May 2013 put Canadian shale gas recoverable resources at 573 trillion ft³. Adding the 449 trillion ft³ for the Montney and the 573 trillion ft³ for shale gas to the 422 trillion ft³ for non-shale and non-Montney natural gas resources as most recently estimated by the NEB, yields estimated total Canadian recoverable resource at 1444 trillion ft³, for a staggering finding of 465 years (measured against Canadian demand in 2012 of 3.1 trillion ft³/year total gas consumption as reported by the Canadian NEB).

Prices in Canada have also been impacted such that the annual average spot price in Alberta (at AECO) was up 28% in 2013 to US$ 3.06/million Btu compared to US$ 2.39/million Btu in 2012, but still 17% below the same price in 2011 of US$ 3.67/million Btu. Equilibrium adjustments are still occurring in the Canadian gas industry as they are in the US, with gas prices in North America well below those in other parts of the world, such as in Europe where the price of gas averaged US$ 11.79/million Btu and in Japan where prices averaged US$ 16.02/million Btu in 2013, according to the World Bank.

Canadian LNG export developments

In Canada, as in the US, there has been significant LNG export activity. While the NEB had approved two export applications over the prior two years, totalling 1.55 billion ft³/d, in 2013 the NEB approved four LNG export applications, totalling 13.1 billion ft³/d. At present, the remaining gas export applications to the NEB total 10.7 billion ft³/d from six projects, all filed since August 2013, and all but 1.4 billion ft³/d from the west coast of Canada.

North America connected

The US and Canadian domestic supply is abundant to such a degree that it will support domestic market requirements as well as export demand for LNG shipped from North America. The new environment of gas abundance not only enables, but is also in need of new market demand that will offer the potential for a steady, reliable base load market to underpin future supply development. As evidenced by the many LNG export applications filed, industry players recognise the opportunity that currently exists due to the current differentials in world gas prices.

With increasing pressure on Western Canadian gas supplies due to the remarkable development of eastern and mid-continent US resources, the need for new markets for Western Canadian gas will be even more dramatic as the prolific unconventional gas resources in B.C. are developed and create what is apt to be a groundswell of commercial opportunity. This market change will continue to develop over the foreseeable future as European and Asian markets discover the benefits and alignment of LNG supply from North America with their own regional requirements for an energy resource from North America that is clean, abundant and low priced.

Note: *With the recent approval of non-FTA exports from Jordan Cove on 24 March 2014, the total exports authorised are now approximately 10.1 billion ft³/d.

The full version of this article is available in the April 2014 issue of LNG Industry.

Written by Gordon Pickering, Navigant Consulting Inc.

Adapted to house style by Ted Monroe

Read the article online at: https://www.lngindustry.com/special-reports/07042014/gordon_pickering_looks_at_north_americas_expanding_role_in_the_global_gas_market/