U.S. Natural Gas is Flowing – Now What?

As part of our series looking at the future of American energy, The Financialist spoke to Osmar Abib, global head of Credit Suisse’s oil and gas investment banking group, about the rise of natural gas production in the U.S., thanks in large part to the development of shale gas fields. 

The shale drilling revolution that has allowed natural gas producers to access vast, previously unreachable resources has already had a profound impact on the U.S. energy sector, but what that means for the broader economy and global trade is a larger question.

The sudden abundance of natural gas has already sent U.S. gas prices plummeting, which has in turn reduced the domestic use of coal – a once unthinkable scenario. In a recent report called The Shale Revolution, Credit Suisse predicts that the U.S. could begin exporting natural gas by 2015, turning plants originally built to receive imports of what was thought to be a scarce commodity into export terminals.

“The plan was that natural gas would come over by tankers in liquefied form,” Abib told The Financialist in a recent interview. “That was before all these shale reserves were found, when the price of natural gas was quite high. These guys were trying to satisfy a market need that turned out to be incorrect.”

The boom has had a knock-on effect, with investments by oil and natural gas producers leading in turn to substantial investments in related sectors, including chemical companies and steel plants.

Such U.S. companies are now making major capital decisions to reinvest in North America, where 10 years ago they wouldn’t have dreamed of it, Abib said.

Shale drilling accounted for about 5 percent of U.S. natural gas production in 2000, but now makes up nearly one-fourth of American gas production, according to the Credit Suisse report. By 2035, shale drilling will account for about half of natural gas production, the U.S. Energy Information Administration forecasts.

The growth has come so quickly that production has at times exceeded storage capacity and pushed down natural gas prices in the United States, which have fallen 80 percent since 2008 and troughed at the lowest level in two decades recently at less than $2 per million BTUs, Credit Suisse research shows. Remarkably, the low prices have not hurt U.S. gas production, which Credit Suisse believes has not yet peaked.

Prices will probably remain low for the near future, Abib said. But because natural gas is still a regional commodity, as opposed to oil, which trades in a global market, natural gas elsewhere in the world is still expensive – making exporting an attractive business.

“Pricing will continue to be low for a while — a while is a matter of much debate, but probably for at least the next couple of years,” Abib said.

“The whole point of the liquefied natural gas game is that people want to capitalize on the low natural gas commodity prices in the U.S. and Canada, and sell at a higher price in Asia, for example,” Abib continued. “Right now, there is a price discount between the U.S. and the rest of the world, and over time that will probably be reduced.”

A recent study by NERA Economic Consulting for the U.S. Department of Energy predicted that exporting natural gas would tighten supply and, therefore, likely increase the prices American consumers pay for natural gas. Still, the study predicted the benefit to the American economy would outweigh the negative effect of price increases.

For now, the natural gas boom’s overall impact on U.S. GDP should be fairly small, despite the fact that certain sectors, such as petrochemicals, utilities and industrial companies that could switch to natural gas stand to benefit from its abundance and relative cheapness, Abib said.

As shale production continues to grow, however, the likelihood increases that cars that run on natural gas could go mainstream. The shift would require major investments, possibly with some government support, to build up filling station infrastructure, Abib said. But with a growing number of vehicle fleets turning to natural gas as a cheaper, greener alternative, average motorists may soon get their turn.

“Natural gas will eventually be used as a transportation fuel,” Abib said. “It’s a bigger logistical challenge (for cars), but that’s ultimately going to happen.”

Though some American politicians have already voiced objections to exports because of a possible increase in domestic prices, Abib is confident some exports will be allowed. The open question is whether the U.S. will emerge as a large-scale exporter.

“My personal view is that the administration will approve exporting natural gas to a point,” Abib said.

While the U.S. isn’t the only country with large shale gas reserves, there is no shale revolution on the same scale occurring anywhere else.

China, for example, may have recoverable reserves twice as large as the United States and is actively working to ramp up domestic production — but the exploration and drilling work there is in its early stages, several years behind the U.S., the Credit Suisse report said.

All told, a combination of favorable mineral rights laws, sufficient experience and equipment to carry out new horizontal drilling and fracking techniques, and a growing pipeline infrastructure has already made U.S. natural gas a global success story that could continue for years to come.

read more at http://www.thefinancialist.com/u-s-natural-gas-is-flowing-now-what/