In January 1959, a converted World War II liberty freighter named The Methane Pioneer set sail from a Louisiana port to the UK loaded with LNG.

Choked by killer fogs from the burning of coal, Britain hoped that “one way to deal with it was to import natural gas,” said Daniel Yergin, a Pulitzer-prize winning author who serves on the US Secretary of Energy Advisory Board.
“That was the beginning of the trade of LNG,” Yergin said at LNG 17 on April 17.

Decades later the US seemed destined to be the recipient of LNG as gas production seemed on the decline.

“Things have turned around,” Yergin said. The US and Canada are expected to be players in the LNG market and perhaps dominate it.

But LNG exports are a puzzle in which each piece is in motion. In the coming years, the US will export billions of cubic feet of natural gas, LNG prices will rise and stabilize at up to three times their price while hampered by the escalating costs of skilled labor.

Today, “everyone has the expectation that the US will play an important role as an LNG exporter,” Yergin said. “Of course the debate is how big of a role and how soon that will occur and how much.”

Yergin, vice chairman of IHS, said he’s struck by how often the unexpected has hit the energy industry.

He wondered what will happen if North American exports turn out to be much larger than people project. “That would change the balance in price formation and ... create question marks for other projects in other parts of the world.”
And what if gas export results in an excess surplus? Or if so much LNG comes into the market and traditional pricing relationships break down to the point of a commodity business?

Yergin said the US should set a new competitive price benchmark for gas around the world for perhaps $12 per million British thermal units (MMBtu). US LNG exports to Japan averaged $14.44 in 2012, according to the Energy Information Administration.

“Obviously that doesn’t mean everyone by any means will adopt that pricing system,” he said. “But it will be possible in some cases to deliver gas from the US to almost any global coastal port.”

Yergin said there are about 30 applications for build facilities. Only a fraction will be built, he said. Such facilities are painfully expensive to build – $10 billion or more.

In January, 20 US firms had submitted applications for US LNG exports. Of those, 16 were approved for countries with free trade agreements (FTA) with the US, such as Canada, Mexico, Chile, and South Korea.

However, Cheniere’s Sabine Pass Liquefaction LLC received approval to export to non-FTA countries. It will be the first LNG export facility built since Alaska’s was constructed in the 1960s.

For the overall natural gas market, “we are optimistic. We expect global natural gas demand to double by 2040 from where it is today,” Yergin said.

By 2040, that would constitute demand of 620 Bcf/d.

“For those that think in oil terms, that would be equivalent to 100 MMboe/d, which is larger than today’s world oil market,” he said.

Natural gas is already encroaching on coal’s territory. Five years ago, natural gas was about 21% of power generation; today it’s more than 30%.

By the 2030s, fuel sources will be in a horse race with natural gas, coal and oil neck and neck, making up 75% of total energy mix, Yergin said. North American exports could be 8 Bcf/d by 2030, Yergin said.

“We would expect in 2040, maybe little before that, natural gas will edge out ahead of oil and coal and become the world’s dominant fuel,” Yergin said.

Yet with such opportunity comes challenges. Development of local resources, for instance, would reduce import demand. One glaring example: the US, which was once thought to be the best growth market for LNG imports.

As late as 2003, conventional wisdom held that the US would be increasingly short of natural gas. In 2008, US natural gas production was obviously increasing, not declining.

More and more companies headed into shale development and by 2010, producers began shifting from gas to oil and liquids-rich natural gas as a glut of natural gas lowered prices.

Yergin said a study of the unconventional oil and gas industry has created 1.7 million US jobs.

“Could the same happen elsewhere? Not quickly. But developments of the last few years once again provide evidence and a warning against linear thinking,” Yergin said.

One wild card: China. The most populous nation may have more recoverable shale gas resources than the US. However, it will take years of drilling and experience, as well as infrastructure, to access.

The real Achilles’ heel will be cost, Yergin said. Since 2005, Greenfield development facilities have doubled and in many cases quadrupled in cost.

“It’s going to be the challenge for the industry to meet,” he said. The costs chiefly will be people, Yergin said.

The pressure is “going to be on the industry, particularly in the US. Process industries will draw upon the same engineering labor skills,” he said.

And Yergin said LNG will take time to develop as logistics, water, know-how and “politics above ground” are sorted.

“This industry needs a clearer narrative about the role of gas to address this wider problem of license to operate,” he said.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.

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