Will shale gas exports from the United States threaten Trinidad and Tobago’s (T&T) niche gas market in the island Caribbean? There is a large body of public opinion (reflected in the media) that seems to think that it will be a threat. Some of us hold the opposite point of view. The shale gas threat has been overblown and T&T need not fear any immediate significant competition from U.S. exporters for the LNG market in the Caribbean. Indeed T&T is very capable of holding its own.
The U.S. Shale Revolution
No one should underplay the impressive energy change taking place in the U.S. It is now the world’s largest producer of natural gas could become the world’s largest hydrocarbons producer by 2020, and a net exporter of energy by 2035. This remarkable historical shift is due largely to the so-called ‘shale gas revolution.’ According to a recent Energy Information Agency (EIA) study, shale now comprises 31% total natural gas reserves in the U.S. and by 2035, shale drilling will account for about half of natural gas production..
U.S. Exports of LNG: An Obstacle Course
The U.S. is expected to become a future exporter of LNG and it will have an impact on the global and regional LNG supply/demand balance. But LNG exports from the U.S. are not yet a done deal!
First, much of the current debate in the U.S. with respect to natural gas exports is focused on LNG. The U.S. Department of Energy (DOE) conducts a drawn out public interest analysis of applications to export LNG to countries that do not have free trade agreements (FTA) with the U.S. In 2011 the agency approved an application to ship LNG from Cheniere Energy’s Sabine Pass Liquefaction project in Louisiana, and in May 2013 granted conditional approval to Freeport LNG to export up to 1.4 Bcf/d over 20 years from its facility on Quintana Island, Texas. Both of these are to non-FTA countries. Other pending applications may be approved before the end of 2013.
Second, aside from obtaining export authorization, project sponsors must also obtain authorization to build a new LNG terminal (“green field”) or expand a terminal (“brown field”) from the Federal Energy Regulatory Commission (FERC).
Most of the LNG terminals in existence today were initially designed to receive natural gas imports, so they lack the essential feature for exporting LNG—namely the liquefaction facility. In April 2012, Sabine Pass became the first terminal to receive FERC’s approval.
Third, the US has only the fourth largest technically recoverable shale gas reserves after China, Argentina and Algeria. However, by the early 2020s, many global LNG projects may come online, and the United States could face steep competition from large existing and emerging suppliers such as Qatar, Australia, Canada, and Russia.
Finally, apart from the stiff competition in the global LNG market, there are other hurdles for proposed U.S. LNG export projects from shale gas. They face a steep uphill battle of opposition from environmentalists, questionable economics (the high capital cost of a “Green field” export facility), and the volatile natural gas price differentials among gas markets. Since shale gas reserves decline much faster than conventional ones, the EIA forecasts that LNG exports from shale gas will probably peak as early as 2027.
T&T’s LNG Game Advantage
So if the U.S. shale gas revolution is not yet a “game changer” for the international market what are T&T’s chances of remaining viable in global LNG markets? Obviously T&T can expect U.S. competition in the 21 countries to which T&T now supplies LNG. But there are several factors in T&T’s favour:
- The trading of gas will continue to grow faster than consumption. Global natural gas demand is projected to outstrip supply in the near future. LNG will play an even larger role. Global LNG production is growing significantly at 4.3% per annum and expected to account for 15.5% of global gas consumption by 2030. There will be significant new competition for global LNG markets. At present T&T remains a significant player in global LNG trade, holding 6% of the LNG market and ranked 6th in the world for LNG exports.
- The flexibility of LNG as a commodity allows producers to switch markets. T&T, Nigeria and Qatar are leading the LNG export diversification. There is a dramatic market shift underway for T&T’s LNG exports away from the US and toward South America and Europe where prices are higher. For example, according to Atlantic, in 2008 about 50 per cent of its LNG went into the US. In 2012 it was less than 20 per cent and declining. By contrast the percentage of Atlantic’s cargoes into South America has grown to over 40 per cent, with Argentina being the largest importer.
- T&T has a fairly long breathing space before US LNG competition kicks in. But there is competition in the long term. According to Albert G. Nahas, vice president for international government affairs at Cheniere Energy, the company does not intend to use its Sabine Pass terminal in Louisiana (under construction) to access the Caribbean market for small scale deliveries, at present. Capacity is pretty much sold out at Sabine Pass through already signed contracts to BG, Gas Natural, Kogas, GAIL, Total and Chevron. Cheniere is also looking for regulatory approval for a second export gas terminal at Corpus Christi to supply Caribbean customers. Construction will start in 2016 so there will be no export from there until 2018-2019. T&T is currently selling gas at premium prices in Asia so it would not make economic sense to reduce its income by providing discounted gas to its Caribbean neighbours. This gives T&T time to get its act together and maximize efficiency at the planned “small LNG” plant at La Brea so that LNG sales in the Caribbean can be price competitive.
- Development costs per unit ton of new LNG liquefaction plants worldwide are very high compared to the original T&T trains. T&T’s LNG for some time will still be cheaper than in most of the world. T&T’s existing trains have a lower cost base and global pricing slack.
The “Bucket (to do) List” T&T LNG
T&T can remain competitive provided that it has sufficient reserves to continue as a major gas exporter. According to the last Ryder Scott Gas Audit in July 2012, T&T has non-associated gas reserves amounting to 13.2 tcf (proven), 6.0 tcf (probable), and 6.1 tcf (possible). In addition, there are “un-risked exploratory resources” amounting to 30.4 tcf. Exploration in the deepwater has been ramped up through successive bid rounds.
Remaining competitive will also entail the following:
- provide creative fiscal regimes that welcome foreign investment models that create alignment between the objectives of the host government and foreign investors;
- capture of small and medium energy LNG cargoes in the Caribbean and Central America:
- encourage other Caribbean countries to invest (as stakeholders) in a small scale specialized facility in Point Lisas or La Brea that specializes in shipping stranded or land-based gas from T&T as CNG or LNG to neighbouring Caribbean countries
- examine the feasibility of investment in small CNG import terminals for regional markets to which T&T will be the main exporter;
- continue diversification of trading partners;
- capitalize further on the huge Asian market (which could be facilitated by the current expansion of the Panama Canal)