[ROCKMAN]

From:
http://www.rigzone.com/news/oil_gas/a/1 ... ort_Permit

Interesting spin. Even more interesting is what isn’t stated as obvious as it seems: why is it happening now? More later.

“The Obama administration on Friday cleared the way for broader natural gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets. A group of private investors plans to turn an import terminal into an export facility to ship natural gas to Japan and other nations. The project, known as Freeport LNG, is expected to require more than $10 billion in investment.

In giving Freeport the green light, the Department of Energy signaled that it found the prospective benefits from exporting energy outweighed concerns about possible downsides for the U.S. economy.”

Beneficial to us NG producers that is. Thank you.

“Proponents of greater exports, including the oil and gas industry, say that exporting inexpensive natural gas from the U.S. will help the U.S. trade balance, help advance the adoption of clean-burning fuels around the world and shore up energy-poor U.S. allies. Opponents counter that exports may cause domestic prices to rise, hurting consumers and some industries such as chemicals that have benefited from cheap natural gas."

A distinction is needed between whose “value” you’re talking about. Selling NG to Japan at 4X the price of what that production can be sold domestically creates a greater value…for a producer.

“The Department of Energy said it had given preliminary authorization to the Freeport project to export up to 1.4 billion cubic feet per day of liquefied natural gas. The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.'s (LNG) Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements."

Again, improves certain portions of the US economy…like mine. For US consumers…not so much.

“Friday's decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That's because according to law, gas exports are presumed to be in the public interest unless shown otherwise.”

Again, with defining the “public” as the Rockman.

"Freeport LNG has signed preliminary 20-year contracts to sell much of the export facility's capacity to Chubu Electric Power Co., Osaka Gas Co. and BP Energy Co. These Japanese utilities have a partial stake in the portion of the facility that is feeding the Japanese demand.”

And now the truly BS portion of the show:

“The combination of hydraulic fracturing and horizontal drilling has unleashed a natural-gas bonanza that made the U.S. the world's largest natural-gas producer.”

Since the very beginning of the fossil fuel age the US has been one of the two largest NG producers on the planet along with Russia. And during the majority of those years the US led Russia. The boom in NG production from the shales helped for sure. But the DW GOM has been a big contributor. When the Independence DW GOM NG hub began operating a few years ago over night US NG production increased about 1 BCF/day. And remember who also benefits from selling that NG for a higher price: the royalty owner…the US govt. The same folks that approved the export license.

“This is an encouraging step," Mr. Bhatia said. "But you need more than one to get a better idea of what pace we can expect them to process the remainder of that queue."

Encourages the heck out of me and other NG producers. We don’t care if the US consumer gets the NG or not. We just want to get paid more for it.

“The DOE said it conducted an "extensive, careful review" which considered "the economic, energy security, and environmental impacts," and found that the project was "not inconsistent with the public interest."

And again, the “public interests” of the Rockman greatly appreciates this review. I know few believe me but in general the oil patch views President Obama as one of the best we’ve had in the White House as far as the industry goes. Social and tax policies…that’s a different matter. Don’t get me wrong: from a position of self interest I’m all for as much US LNG exports as possible. I just don’t feel the need to wrap it up in an American flag and say it’s the patriotic thing to do. Not as long as we have boots on the ground in the ME getting zapped by IED’s from time to time.

[diemos]

I heartily approve of exporting LNG.

By driving the domestic price of natural gas up to world prices we will:

1) Put an end to the short sighted rush to close nuclear and coal plants in favor of natural gas.
2) Support our ally Japan until they can come to their senses and turn back on their nuclear plants.
3) Help the balance of trade.
4) Encourage further adoption of renewables.

All good.

Plus on the political front you have a domestic lobby that will fully support it.

And if the right give you trouble you just shout, "Free trade! Free trade! I though you guys were in favor of free trade? And what do you mean, our natural gas? You don't have a natural gas well in your pocket do you? Whadda you? Some kind of socialist? I thought you were a private property capitalist."

[diemos]

http://www.ferc.gov/market-oversight/mk ... pr-est.pdf

[Plantagenet]

The US was already exporting gas to Japan. Producers in the NW would sell NG to Canada (which was legal) and the Canadians were happy to re-sell the US gas to Japan and ship it out of their NG terminals.

[Ron Patterson]

Tad Patzek commented on this policy on his blog: Sunday, May 19, 2013.
http://patzek-lifeitself.blogspot.com/ Energy Exports May Not Be Good

So far so good, especially if everything can be traded over infinitely long times (centuries for us) with a perfectly smooth substitution of one resource for another and one product for another. But this assumption does not hold for depletable resources, whose production does not adjust easily and instantaneously to demand.

He discusses the example of the United Kingdom under Thacher. They exported oil when oil was very cheap. Now they are importing oil when oil is very expensive.

[ROCKMAN]

Ron – Good point. One difference with the LNG export model vs. England exporting oil: the folks supplying the NG to be liquefied have legal obligations to do so for many years…probably 15 to 25 years. One cannot invest $billions in an export facility without having a guaranteed supply of NG. Likewise the LNG purchasers also have to make such legal obligations with respect to price and volumes. IOW these are not arrangements that can be easily modified 5 or 10 years down the road. England had the option to stop exporting N Sea oil at some point. The LNG exporters/buyers will few little options.

I won’t try to put numbers on the potential resurgence of the gas shale boom. But when I was at Devon the company became very concerned about chasing the Haynesville Shale when price got down to the $6 - $7 per mcf range. At $4.50/mcf they paid a $40 million cancelation penalty to release 14 of the 18 rigs they had drilling in the trend. The international LNG spot market is running around $17/mcf last time I looked. I was once told it cost about $1 -$2 per mcf to liquefy and about that much to transport. So not counting the profit margin the exported LNG should still be a good business even if domestic NG reaches $10/mcf or so. Good for the oil patch since they could once again go after the gas shales. Good for the LNG exporters and buyers if the economics work for the oil patch. But not as good for US consumers who’ll have to compete to some degree with international NG prices that are more than twice what they are paying today.

[kuidaskassikaeb]

Dear Rockman

Ron – Good point. One difference with the LNG export model vs. England exporting oil: the folks supplying the NG to be liquefied have legal obligations to do so for many years…probably 15 to 25 years. One cannot invest $billions in an export facility without having a guaranteed supply of NG.

You have a much higher opinion of money managers than I do. Especially after the recent bubbles. I also think that high prices are a good thing, but I can't imagine this working. If you won't even guess about natural gas prices a few years ahead, what makes you think they know.

There are in my opinion two possible outcomes.

In one, fracking does open up a whole world of gas, in which case gas prices overseas collapse the way they did here and so does the export market. All the oil in the rest of the world also comes from source rocks, and the usual reasons given that it can't happen there are pretty bad in my opinion. .

In the other case fracking is a short term fix, like a lot of people around here thin and prices start up again right away, also destroying the export market. Meanwhile the rest of the world has their short term excess gas.

I really think this is a loser

[MD]

Look back three or five years at LNG shipping capacity plans and you'll see why there is eagerness to build a LNG terminal in Freeport.

[TheAntiDoomer]

Tad Patzek commented on this policy on his blog: Sunday, May 19, 2013.
http://patzek-lifeitself.blogspot.com/ Energy Exports May Not Be Good

So far so good, especially if everything can be traded over infinitely long times (centuries for us) with a perfectly smooth substitution of one resource for another and one product for another. But this assumption does not hold for depletable resources, whose production does not adjust easily and instantaneously to demand.

He discusses the example of the United Kingdom under Thacher. They exported oil when oil was very cheap. Now they are importing oil when oil is very expensive.

Didn't know you posted here Ron, it will be nice to finally be able to challenge your ideas and notions without Leanans heavy editing hand on me

[ROCKMAN]

K – You need to understand that none of the parties involved are guessing anything about future NG prices. Real examples are always better than models: about a year or so ago Chenier signed a 20 contract with a 10 year extension option with a British utility to deliver a certain volume of LNG from their facility at Sabine Pass, Texas, to England. There’s no price or bubble risk for any of the parties involves. Chenier had this contract in place before they began spending many $millions converting the facility from import to export. The price the Brits pay for the LNG is pegged to the price of NG at Henry Hub in S. La. + a contractual markup for the liquefaction, transportation and profit margin. Chenier knows how much they’ll make for the next 20+ years. The Brits know what they’ll pay for the LNG: the market rate for whatever NG is selling for in the US plus the fees Chenier is charging them. Whether NG prices go up or down in the US the Brits know they’ll be paying at a minimum what they would have to pay on the spot market. But they probably would have to pay more during a supply shortage. And if there’s a supply surplus: HH prices go down and the Brits pay less. But there’s one thing the Brit utility knows for certain: it will have that volume of NG for the next 20+ years. That’s often more important to any utility then what they have to pay for fuel.

But Chenier isn’t a NG producers…how can the Brits be sure they’ll deliver the LNG for the next 20+ years? Because Chenier was required to buy a 20+ year contract from either a NG producer or they just bought that much NG future contracts. And if Chenier bought long term contracts from a producer how can they be sure that producer will always be able to deliver the contracted volume? Easy: Chenier would have had the NG producer either bond the contract or acquire sufficient NG future contracts to cover the contract volume.

This isn’t my end of the oil patch but I know a little about it. And the dynamics I just described? This is a rather simple arrangement compared to some I’ve seen. The folks making these deals are not money managers. They are folks very experienced in trading commodities and have seen more than one company burned to the ground by not adequately protecting their positions. For the most part the folks in this end of the business are the most risk averse around. There are bubbles out there for sure and many will burst. But folks doing these types of LNG trades won’t likely be victims IMHO.

This is the same point I've been hammering on about the Chinese spending hundreds of $billions building new refineries around the world. They wouldn't do that unless they had guaranteed supplies of oil to feed those plants. Which is exactly why they are forming JV's with the various oil exporting nations. Which is why there will a good bit less oil on the open market to buy them some are expecting.

[ROCKMAN]

Words of caution from the Energy Dept

The new U.S. Energy Secretary promised a review of the government's existing studies of natural gas exports, raising the possibility that the U.S. might re-do the analysis that has underpinned previous permit approvals. Moniz is "committed to doing a review of what's out there in terms of impact analysis" before approving more applications to export U.S. natural gas. The Department of Energy is the primary agency reviewing more than a dozen pending applications. If the department decides to undertake a new review of how exports would impact the U.S. economy, it could delay future permits.

"Right now we have no plans of commissioning new studies, but everything is on the table until I have done my analysis," Mr. Moniz told reporters. He said he had promised Senate Energy and Natural Resources Committee Chairman Ron Wyden (D., Ore.), that he would conduct a review "to make sure, you know, that we are using up-to-date data, and then we want to go forward." He reiterated the department's policy of evaluating applications "case by case" and said he wanted the evaluations to be "expeditious."

[ROCKMAN]

Some Asian countries, including China, are figuring how to get some of that landlocked NG out of North America. From:

http://www.rigzone.com/news/oil_gas/a/1 ... NG_Project

The contract has been awarded by Pacific Northwest LNG and involves engineering services for an LNG project on Lelu Island, British Columbia. The project includes two six-million tons per annum LNG trains, process units and marine facilities. Technip will execute the contract along with the consortium project team in Seoul, Korea and Beijing, China. The project is scheduled for completion in the second half of 2014.

[kuidaskassikaeb]

But Chenier isn’t a NG producers…how can the Brits be sure they’ll deliver the LNG for the next 20+ years? Because Chenier was required to buy a 20+ year contract from either a NG producer or they just bought that much NG future contracts. And if Chenier bought long term contracts from a producer how can they be sure that producer will always be able to deliver the contracted volume? Easy: Chenier would have had the NG producer either bond the contract or acquire sufficient NG future contracts to cover the contract volume.

This isn’t my end of the oil patch but I know a little about it. And the dynamics I just described? This is a rather simple arrangement compared to some I’ve seen. The folks making these deals are not money managers. They are folks very experienced in trading commodities and have seen more than one company burned to the ground by not adequately protecting their positions. For the most part the folks in this end of the business are the most risk averse around. There are bubbles out there for sure and many will burst. But folks doing these types of LNG trades won’t likely be victims IMHO.

No I still think this doesn't work. But frankly I feel like you made my argument for me, with just a few changes in opinion.
Basically as long as the U.S. price stays much lower than the British price everybody will be happy. If it changes a lot somebody will lose some money. If they lose enough they either go broke or brake the contract.

[ROCKMAN]

k - I still don't follow you. Chenier makes a profit regardless of what NG sells for in the future. Its profit is fixed by the contract. The Brit utility will sell the NG to its customers at a profit if their utility laws are similar to ours. Whoever is supplying the NG to Chenier has a price locked in via either futures contracts or an indexed sales contract to Chenier. Exactly who is going to lose money and how?

If the price of US NG increases how does that hurt the Brit utility? The Brits are getting the LNG today at a slightly lower price than they can buy domestically. But for a utility the most important parameter isn’t how much they are paying but how much then can buy. I don’t know if you were paying attention to the NG situation in England but it ain’t the US. Several times during the last couple of winters they came close to having as little as one day’s supply of NG available to the consumers.

As far as breaking contracts I explained clearly that all the NG is backed by guarantees of one form or another. You may be confusing these transactions with other activities in the oil patch. There are certainly lots of ways to go broke. So I can only ask again: in this arrangement who might go broke/lose money and how so?

[Tanada]

Two question matter the most to me, How much will exports cost me in increased domestic gas price? How much will export of LNG encourage more natgas fracking?

[ROCKMAN]

tanada - For the last 20 years US NG production has been between 18,000 bcf and 27,000 bcf per year with the highest rate in history just recorded. An LNG plant knocking out 1 bcf/day is a big operation. So for the 74 bcf/d we’re currently producing that plant would remove 1.4% from the domestic market. So even 3 or 4 such plants wouldn’t reduce domestic supplies greatly.

OTOH in April 2012 NG got down to $1.89/mcf but since then prices are pushing $4/mcf even though we’ve added about 1.8 bcf per day. IOW we’ve increased domestic production by 1.4% but have doubled the price of NG due to greater demand. So how would reducing domestic supplies by 1.4% change the price of NG?

I don’t know. At first it looks like a little math might give a hint but I think the dynamics are too complicated for such a simplistic approach. All I would say is that exporting NG would increase domestic prices ALL THINGS BEING EQUAL. But I don’t believe all things will be equal as we tumble down the POD path.

As far as frac'ng I don't think the pubcos need anymore encouragement than they have right now: IMHO it's either frac or die. Seems like an easy choice.

[rockdoc123]

Two question matter the most to me, How much will exports cost me in increased domestic gas price? How much will export of LNG encourage more natgas fracking?

A number of years ago while looking seriously at LNG from SE Asia sources it became clear from talking with just about every large consulting firm that dabbles in understanding global markets that once LNG shipments really became a reality around the world natural gas pricing would seek a "world price" all on its own. At the time the pundits figured $6/MCF would be a reasonable number simply because you are mixing very low cost gas (Qatar) with everything up to high cost gas (offshore Australia). Right now there are huge gaps in prices with gas selling for $3- $4/Mcf in North America and LNG selling for $14/MCF in Argentina. For North America a price of $6 would certainly increase activity in the higher cost shale gas areas (eg. Haynesville, some of the Marcellus, Horn River).
Predicting what the short term impact would be in the US is difficult as it is a product of how much LNG can actually be shipped, what the demand risk profile is where it is being shipped and a bunch of other economic factors. I think you could easily see a see-saw effect on natural gas price in the US where the initial export of LNG would drop domestic supply and increase price which would be followed by increased activity and short term oversupply which would then result in lowered prices. How long it would take for the US and Canada to stabilize their production and export to avoid an oversupply and hence lower prices than seen elsewhere is a big question.

[EdwinSm]

And if the right give you trouble you just shout, "Free trade! Free trade! I though you guys were in favor of free trade? And what do you mean, our natural gas? You don't have a natural gas well in your pocket do you? Whadda you? Some kind of socialist? I thought you were a private property capitalist."

+1

While in a transition economy we will need to support local businesses and products, there seems to be some very strong anti-free trade sentiments coming from people who claim to support free trade (another example is the transporting of fuel from one port to another).

[ROCKMAN]

Folks should take doc's word to heart. He's dealt directly with that world while I just fluttered around the periphery. It does emphasize why I push the concept of the POD vs. PO. The key word is "dynamic". It really is a living breathing creature and while some parts may be a tad more predictable than others there is no "final answer". All one can do IMHO is to try to judge the sensitivity of the various components to the "answer". For instance on paper the amount of potential US LNG exports would appear minor in the short term and thus the effect on domestic NG prices may be minimal. But what happens if there's a very cold winter or two matched with some very hot summers (driving up AC/electricity/power plant NG consumption) and it happens coincidental with a rapid decline in DW GOM NG production. And this happens at a time when the oil patch stays focused on the oily shales much more so than the gas shales because oil prices are still attractive and those plays are pulling out most of the capex?

I think this is a situation where it’s as important to understand what you don’t know as what you do know.

[kuidaskassikaeb]

Rockman wrote

k - I still don't follow you. Chenier makes a profit regardless of what NG sells for in the future. Its profit is fixed by the contract. The Brit utility will sell the NG to its customers at a profit if their utility laws are similar to ours. Whoever is supplying the NG to Chenier has a price locked in via either futures contracts or an indexed sales contract to Chenier. Exactly who is going to lose money and how?

I guess what I would say is this, and it fits in with what RockDoc says. The driving force for exports is obviously the price difference between US. and UK natural gas. Where I see weaknesses in this deal is, that for it to remain profitable those differences have to remain in place for 20 years ( I got this from your explanation, so if I'm wrong tell me.), and if they don't, the market reason for the exports collapses. At that point somebody looses money, and if the export terminal is as expensive as you say, it's a lot of money. Chenier's real plan B is that there will be a world price and they can sell for that.

I have been following the gas situation in the U.K. and Cameron has already endorsed fracking, and I heard some talk that their shales are even thicker than ours, and there is that very high price which would make fracking profitable. As far as I can see the technology is owned by companies like Schlumberger that are already world wide.

If you look at a sketchy history of the world oil market you can see parallels. The U.S. was the first producer and the technology spread out from the U.S. At or around 1970 the U.S. peaked and began to decline, there was an increase in price and lots of new technologies were invented like fracking and horizontal drilling. But then along came the Super tanker. Because the U.S. now had access to cheap "conventional oil" from overseas these new technologies were not profitable, and they weren't used. Their use had to wait for enough of the rest of the world to peak and the price to rise again.

The people who exported oil to the U.S. and Europe didn't have to worry about the oil price falling, because we had already used up a lot of the cheap oil, and couldn't supply ourselves at the world price. Chenier does't have that luxury. Anyway history seems to be repeating itself except at a much faster rate. So it seems likely to me that the U.S. price will not be lower than the world price for very long, and if fracking doesn't produce all that much gas maybe even higher.