US Fracked Natural Gas Headed for Asia as LNG. Watch Domestic Prices Soar.

Dear Readers, more permits have been issued to export US fracked natural gas as LNG. Our gas, our so-called energy independence and national security is headed for Asia where the Big Gas Mafia can get a lot more money for it. These are long-term contracts–20 years–to sell our fracked gas. It is vital that you pay attention.

“…the Chinese are willing to pay a premium to secure North American resources necessary to feed the growing Asian economy.”

Here is the Big Gas Mafia’s dual path. Either way, you lose.

From Deborah Rogers, Energy Policy Forum:

At the recent Marcellus Shale Insights conference held in September, 2011, Aubrey McClendon, CEO of Chesapeake Energy stated ” a cleaner, safer and more prosperous future awaits if we commit to fuel our economic engine with shale energy made by Americans and for Americans.”

Domestic energy security is, of course, is a political hot topic and bears scrutiny.

A mere week after such comments were made, another proposal to build an LNG export terminal was filed with FERC (Federal Energy Regulatory Commission) for the exportation of shale gas from the US to markets in the Far East. Last week, it was announced that the first export terminal at Sabine Pass had been permitted and shale gas would indeed be exported from the US.

The demand for natural gas has grown exponentially in recent years in emerging economies, particularly Asia. According to the Oil and Gas Financial Journal, “…the Chinese are willing to pay a premium to secure North American resources necessary to feed the growing Asian economy.”

Other foreign operators want in the game as well. Royal Dutch Shell recently commented that “Shell has placed a big emphasis on North American gas; it’s an area of growth for us. We’ve invested something like $15B since 2004 in the onshore [sector]. What [we] develop here, [we’d] like to export to the rest of the world.”

Currently, the price of natural gas in Asian markets is substantially higher than domestic U.S. prices, as much as 3-4 times higher because it is indexed to the price of crude oil.

A country like Japan, for instance, that has no domestic supply of natural gas is currently paying as much as $15 per million BTU for multiple year natural gas contracts. Domestic U.S. prices, on the other hand, are trading at a mere $3-4 per million BTU. This means that gas can be extracted, piped, liquefied and delivered to Japan for around $9 and then sold for as much as $15, a substantial spread.

The natural gas industry has pushed hard to effect a two prong approach: infrastructure changes, such as large scale conversion of power plants and truck fleets to run on natural gas, popularly known as the Pickens Plan, and exportation abilities. Industry refers to increased domestic usage as “the holy grail.” The populist argument states that creating new domestic markets for natural gas would free the U.S. from foreign reliance on fossil fuel and give the U.S. a decided advantage. Of course, it would also be advantageous for the operators because a robust domestic market would cause prices to increase and close the pricing gap with crude oil which has always been a primary industry objective. In other words, the “holy grail” is pricing parity couched in populist rhetoric.

But perhaps more to the point, pricing parity can be effected much more quickly by exporting natural gas to Asian markets which are already paying 3-4 times more than the U.S. domestic market. Interestingly, exportation has not been publicly promoted by industry in the way the Pickens Plan has for obvious reasons; it does not concur with the populist message. Nevertheless, it has been pursued as a parallel path and is now a reality with the recent announcement that the first terminal at Sabine Pass has been permitted and shale gas will indeed be exported to Asia

But if U.S. natural gas is allowed to be exported as a major source of energy to the rest of the world, then domestic prices will inevitably rise, perhaps precipitously and natural gas will no longer be a cheap source of energy for chemical feedstocks, manufacturing processes or utility generation in the U.S.

This would effect a classic consumer squeeze. Hence the two prong approach. It makes good business sense.

Interestingly enough, however, from a consumer’s perspective, there are enormous benefits of a low natural gas price, particularly for the American economy. Industry itself likes to mention that the abundant supply of natural gas has dropped the price since 2008 by 67% thereby providing an economic stimulus of $250 million per day. That is substantial.

This has indeed been a serendipitous boon for our ailing and sluggish economy. In fact, manufacturing industries such as plastics are now announcing plans to ramp up production in the US specifically because they foresee cheap and abundant natural gas going forward.

But this may be short lived. If prices rise precipitously and manufacturing is locked in to natural gas as feedstock, an inflationary scenario will follow.

Further, such exportation contracts could obviously undermine US energy security by potentially locking the US into long term export contracts at fixed prices. At that time, the populist notion of “shale energy made by Americans and for Americans” is defunct in that we would be depleting our natural resources willingly to grow Asian economies. This is particularly problematic if reserves are not as great as expected because we could then face questions of scarcity while locked into long term contracts. EIA recently slashed its reserve estimates for the Marcellus by 80%. Its prior erroneous estimates had been based on information provided to government by industry as to how much shale gas was commercially extractable. Clearly, government needs more independent verification of reserves before agreeing to export.

Interestingly, at least one shale gas CEO inadvertently spoke frankly of such a consumer squeeze which might follow a precipitous rise in gas prices. He stated that if the price of natural gas “went through the roof”, 70% of American homes on natural gas heat would be cold; 35% of American homes and businesses and factories that use electricity from natural gas would be dark; and crops that require natural gas fertilizer would not be grown.
Yes, but oil and gas operators will have turned a very handy profit which is maybe what Chesapeake Energy’s CEO was really talking about when he said a “more prosperous future awaits”.