The Reasons to Wonder About Natural Gas Prices

Asian demand for natural gas has risen sharply in recent years.  Prices in dollars per million BTUs, are about $13.50 in Argentina and $13.80 in Japan and South Korea, and $13.40 in China.  Even Argentina has a $13.50 price, but U.S. wholesale prices are about $2.50 to $3.00.

The world price disparity raises a question that swirls just under the surface of the national energy conversation, which whipsaws between relieved happiness that shale gas exists at all and unfounded fears stoked by extremists that the method of extracting it called fracking, is polluting the water.

The stoking operation abetted by a hysteria sales effort from the media covers up a serious and important debate largely shadowing over the other market players: the rest of the world’s consumers.  They want less expensive natural gas.

The natural gas in the U.S. could be sold for those dear high prices.  Alaska has lots of natural gas that is stranded up there without transport to the lower 48 states, so Alaska wants to build a $50 billion pipeline and Liquid Natural Gas export terminal to sell its stranded supply – anywhere. Exxon Mobil Corp., BP Plc and ConocoPhillips expect to deliver plans for such a project to Alaska Governor Sean Parnell by the end of September.

Alaska and those big petroleum firms are not alone.  In the lower 48 states lots of smaller companies drilled and found, fracked and produce natural gas at painfully low prices. North America could be said to be a continental sized stranded natural gas location.  The U.S. prices are so low because the supply is so great and because it’s trapped in markets served by North America’s pipeline network.

The U.S. situation is as close to nirvana as consumers can hope to get.

The supply of natural gas could become more even worldwide.  Natural gas can be moved without pipelines but it requires overcoming a considerable investment to get it done. Unlike oil, a liquid that simply pumps on and off tanker ships, and coal, a solid that fills up huge barge like transport vessels, natural gas just wants to be freed. It’s lighter than air and will disperse into the atmosphere at every leak. Natural gas must be contained before it can be shipped.

This is no small job.

There must be fully developed gas fields, of which the U.S. has many, and build hundreds of miles of pipelines to bring the gas to a seaport with an infrastructure that’s pretty much in place.

Then the costs really add up.  Exporters must build the massive port facilities to liquefy the gas by lowering its temperature to about -260º. The Department of Energy has approved one new Liquid Natural Gas export terminal, at Cheniere Energy Inc.’s existing import terminal in Cameron Parish, Louisiana. Nearly a dozen others are under DOE review.

Now add in investing in a fleet of specialized tankers to transport the gas by sea.

Keep in mind how quickly this is all happening, less than 10 years ago the U.S. was expecting to build more import terminals.

After the trip to the customers’ seaport a facility will need to de-liquefy the natural gas – very carefully! – And build the pipeline infrastructure to deliver it to end using customers.

If the U.S. sells its gas overseas, the question that comes into view is, “How much, for example, might future U.S. prices – for U.S. natural gas – rise, as say, future South Korean prices fall?”

The U.S firms, landowners and the folks working in the industry all would like to sell gas to foreign consumers, where they can ask a much higher price. Meanwhile U.S. utilities, manufacturers, which use gas in an industrial feedstock, plus millions of residential and business consumers, would like prices to stay low.

That’s the fight going on behind the special interests’ hype over the well fracking matter.

This isn’t a deal that consumers should over look.  A fourfold increase in the U.S. to world prices would be an economic disaster.  Policy making bureaucrats, politicians and business leaders are working to gain better understanding of the relationship between potential U.S. exports and prices at home before they make commitments to build new outbound gas liquefaction terminals.  Much of the export capability would be at government expense, a contradiction to risking higher U.S. prices.  Asking taxpayers to support export profits while increasing consumers’ bills is a dangerous political move.

The U.S. Energy Information Administration reported in January that, according to its simulations, more gas exports would mean higher prices for gas and electricity, and some fuel-switching back to coal-fired electricity generation.

The work to gain an understanding of the risks is no simple thing.  A Rice University Baker Institute study finished in August shows there’s nothing to guarantee that the world market will always look so enticing for U.S. exports as it does now. Fluctuation in exchange rates, the potential foreign gas discoveries and the global price effects from the U.S. increasing world supply would all change the picture in unpredictable ways, the report states, creating major risk for export efforts.

For a few years the U.S. has enjoyed the newly accessible natural gas energy source.  For a few more years the controversy over fracking will play out, as the technology is about 50 years old without credible problems only suggested by the hype and media hysteria.  That leaves the U.S. with the question –

Should the U.S. keep its natural gas or sell it away?

The reality is yet to play out.  The world gas market will continue to change, the potential for profit will stir up a production boom about like the one in the U.S. this past decade.

It might all be an exercise in wasted time and money.  This situation has happened before, back then a lot of money was spent only to have the market – evaporate.