The US gas triple threat

By Leith van Onselen

The Sunday Age/SMH ran two articles picking-up on the looming threat to Australian coal and gas exports caused by the shale oil and gas boom currently gathering pace in the US. First, here’s David Pott’s take on the situation (my emphasis):

…our sovereign debt is low by global standards, but it’s a different picture when you add household and business borrowings as well.

That puts our debt burden at 321 per cent of GDP, far worse than basket case Greece’s 274 per cent, according to AMP Capital’s chief economist, Shane Oliver…

Australia tends to fly under the radar because a good part of the debt has gone on mining investment, considered more credit-worthy than investing in schools, hospitals and tanks.

Yet we may have managed to blow the mining boom. Two-thirds of the investment has been in energy projects, namely gas.

Trouble is, gas prices are lower than when they were commissioned. And their costs are a lot higher, in part because of the strong dollar – they’re all foreign-owned, and so count in depreciated US dollars.

The talk is that the gigantic, aptly named Gorgon project is running about 50 per cent over budget.

Worse, there’s a gas glut in the US supplied from shale, which will make it more than self-sufficient in just a few years.

If the dollar stays strong, the US will probably be able to export LNG to Asia cheaper than we can. At the same time the gas glut is tipping coal no longer needed in the US onto the market. Our LNG contracts are indexed to the oil price, so fingers crossed it holds up.

After all, higher petrol prices would be a small price to pay for keeping the boom alive.

And here’s Malcom Maiden discussing some of the implications for the global economy arising from the boom in US shale oil and gas:

The growing consensus on Wall Street is also that the US shale boom is a global economic and geopolitical game-changer…
The US will certainly benefit from cheap domestic gas that will deliver cost benefits to heavy industries including petrochemical plants and power stations, but the horizontal drilling and rock-fracturing technology that is freeing up shale gas and oil will ultimately generate sweeping global changes.
Shale oil can be commercially exploited at oil prices as low as $US80 a barrel, and as shale oil volumes rise, oil price spikes in response to accelerating growth in demand that work to slow demand again will be much less frequent. Shale oil, in other words, is going to raise the maximum speed limit of the global economy.
While not clearly evident, the two articles combined touch on three potential threats to Australian exports from the shale oil and gas boom in the US.
First and most obvious, the exploitation of shale gas in the US has seen significant coal to gas switching in power. As a result, surplus US coal is being redirected into the seaborne market, which is adding to supplies into Asia and depressing prices globally. According to the Energy Information Administration, the US used 18% less coal for electricity generation in the first half of 2012 than in the same period in 2011, and 27% less than in 2008, which was the year coal consumption peaked. And by March 2012, coal’s share of the US electricity-generation market had fallen 34%, from 47% just three years earlier. All over the US, coal-burning electricity plants are reportedly closing down or converting to natural gas, whose prices had fallen by -56% in the year to April 2012.The US is the world’s second biggest coal producing nation after China. With coal being displaced domestically by cheaper natural gas, the US is moving to export its excess to the rest of the world, helping to push down coal prices globally. Indeed, US coal exports reportedly rose 56% between 2009 and 2011, according to Businessweek.Second, as noted by Houses & Holes on Friday, there are reportedly 15 large LNG projects seeking approval to export from the US. And according to the recently published International Energy Agency (IEA) annual report, the profit margin available from exporting gas to Asia  is expected to remain far more attractive than prices available within the US (see below chart), suggesting that the desire to export LNG from the US will only grow.

Looking ahead, Australian LNG exports are facing increasing competition from lower cost and equally reliable US supplies, which is likely to crunch profit margins, curtailing Australia’s pipeline of gas projects.

Finally, with Australian LNG export pricing linked directly to oil prices, and the production of shale oil in the US tipped to surge (see below IEA chart), there is the possibility that global oil prices could slump as the US begins exporting oil and/or imports less oil from abroad, resulting in lower prices for Australian exports of LNG.

US oil production New Policies scenario - IEA

When viewed alongside declining demand for thermal coal within China as it shifts towards alternative energy sources (e.g. renewables), Japanese moves to end oil-linked pricing on LNG imports, as well as the recent discovery of large gas deposits in Africa, it appears that the Australian LNG and thermal coal industries are facing some very stiff headwinds that could challenge previously held assumptions about profitability and project viability.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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Comments

  1. As a many people have pointed out, the IEA is a tad optimistic when it comes to US shale oil production. Even if the IEA’s forecasts come true, US shale oil production will peak at around 2 million barrels per day in 2020, in a world that consumes around 95mbpd.

    As for US shale gas, production peaks and declines very early, so the gas glut is likely to be short-lived, maybe 5-10 years. But in the meantime it makes things very difficult for the big Aussie LNG projects.

    • Thats not what I am hearing over here Lorax. Also if I am correct there is enough oil between the North/South Dakota and lower part of Canada to supply North America for like 200 years or something along those lines.

      How much shale oil is known to be available?
      There are an estimated 2 trillion barrels of oil in the United States, comprising 60% of the world’s oil shale resources.

      http://www.amso.net/FAQ.aspx

      There was something on the news the other day to say Iraq has way more than Saudi Arabia and is has alot of it coming online now. I hope all this will drive oil prices down. I am tired of paying the amount we pay here in the US and what we payed when we lived in Australia.

      • Oh dear. LBS, its not about reserves its about production rates. See the IEA chart (3.18) in Leith’s post. See how light tight oil (aka shale oil) peaks and declines very early?

        Iraq OTOH almost certainly has a lot of oil that can be produced quickly. You don’t think (Texas oil man) George W. Bush went to war to liberate the Iraqi people do you?

        As for the price of fuel, we should all be paying what the Europeans are, if not more.

        • I really must take exception to this:

          “You don’t think (Texas oil man) George W. Bush went to war to liberate the Iraqi people do you?”

          Firstly: It was always far cheaper to just buy oil off Saddam, than invade his country. The critics of Bush and the USA need to make up their minds what they want. If the USA buys oil, that is “propping up brutal dictators”. Never mind that if the USA does not buy it and cuts the said dictator off, Russia, France and China step in and buy the oil and do any propping up that is required.

          Secondly, oil companies from which countries, predominate in oil deals in Iraq after the war? France, Russia and China. This is a very strange thing for an alleged militant “blood for oil” invader, the USA, to have allowed to happen after successfully invading.

          Being of possessed of reason and a sound and unpoisoned mind, I DO believe that George W. Bush went to war to liberate the Iraqi people. I remain wholly sceptical about the potential for “nation building” in nations where the religion is a medieval reactionary one, and do not support Bush over this, but rather support Kissingerian “realism”. I respected the late Christopher Hitchens among the international Left, for at consistently opposing Kissingerian realism and supporting Bushian nation building. Almost the entire “rest of the Left” are exposed for their utter hypocrisy because of their opposing BOTH things.

          • Cheney Energy Task Force Documents Feature Map of Iraqi Oil Fields

            Judicial Watch, the public interest group that investigates and prosecutes government corruption and abuse, said today that documents turned over by the Commerce Department, under court order as a result of Judicial Watch’s Freedom of Information Act (FOIA) lawsuit concerning the activities of the Cheney Energy Task Force, contain a map of Iraqi oilfields, pipelines, refineries and terminals, as well as 2 charts detailing Iraqi oil and gas projects, and “Foreign Suitors for Iraqi Oilfield Contracts.” The documents, which are dated March 2001, are available on the Internet at: http://www.JudicialWatch.org.

            And in case you’re wondering, Judicial Watch is a conservative organisation.

          • Amazing that there are still people who think the US attacked Iraq to free the Iraqi people.

            Anyone who still thinks that should be red-faced. 😳

          • Yep. With his vice president running around making statements like the following, the Bush-the-idealist line is a little bit difficult to swallow:

            The Middle East, with two-thirds of the world’s oil and gas and the lowest cost, is still where the prize ultimately lies.
            DICK CHENEY, comments to the Institute of Petroleum in London, 1999

            Of course we all know how Bush and Cheney’s war to “liberate” Iraq’s oil turned out. So with that in mind, the Bush-the-realist line is also a little difficult to swallow.

            Much more believable is the Bush-the-DumbAss line. Or as Hannah Arendt put it:

            Image-making as global policy—-not world conquest, but victory in the battle “to win the people’s minds”—-is indeed something new in the huge arsenal of human follies recorded in history.
            HANNAH ARENDT, “Lying in Politics”

          • Firstly:
            1. Who would have had to pay for the oil? The oil companies.
            2. Who DID pay for the war?
            USA taxpayer.
            3. Who therefore obtained access to the oil effectively for gratis?
            The oil companies, ie. the 1%.
            4. Who is still paying for the deficit?
            The 99%.

            Secondly:
            Unfortunately the plan went pear shaped. No quick victory, despite GW calling it so. Things got very messy and it took ’em a decade to extract during which they got gazumped!!

          • I stand by what I said. You guys are stuffed in the head. So what if some commercial analysis of world energy supplies, had data on Iraq in 2001? This is just good commercial analysis. It would be very bad commercial analysis that did NOT have this.

            The “foreign suitors” for Iraq’s oil got it anyway; why “invade Iraq for its oil” and then let French, Russian and Chinese firms bid and win almost all the tenders for it?

            And why not just buy it off Saddam? Much cheaper. Of course the world’s leftist liars will damn the USA whatever it does.

            Sure there are “conservative” organisations in the USA that resent “big government” in the form of international military adventurism. This motive is 180 degrees different to the motives of the international left who despise the USA for being the world’s policeman and preventing communist “utopia”/enslavement for their global fellow citizens.

        • “Oh dear. LBS, its not about reserves its about production rates. ”

          Lorax, not trying to sound like your mate 3d1k but I am here in the US and recruit for mining, IT, Oil/Gas projects. Your comment ” As for US shale gas, production peaks and declines very early, so the gas glut is likely to be short-lived, maybe 5-10 years.” is not very accurate. The US has so many reserves that it is tapping into and will continue to do so. It is not going to be a short lived thing like you are stating. Now not trying to get off subject but Obamacare could kill it. That might be your saving grace with your comment.

          • Otherwise dont believe everything your read about the US LNG and what UE states and the other people in the articles state that he quoted are very accurate from what I am seeing.

          • Obamacare could kill it.

            Now I’ve heard everything!

            IMO, the shale gas boom will be short-lived. The shale oil boom will disappoint, and fail to deliver anything like the forecast production numbers.

            In the meantime, the gas glut in the US will cast a shadow over LNG investment in Australia.

    • Shale is the big red reset switch for the US. It could also be a big red fuckery button for our RE market.

  2. Maybe I am just missing the point here, but should not the lift in ‘maximum world economic speed limit’ actually benefit Australia over the long term, as an export-driven economy?

    I do, however, get that no matter what the long term consequences, due to the huge investment in productive capacity in Australia any prolonged low in commodity prices augurs poorly for that investment and therefore the country.

  3. US is years away from exporting LNG on any scale. I linked to two excellent reports last week (incl. Oxford University Energy department). Australia remains favourable geographically positioned and the investments in LNG will benefit for decades. Where the price sits by 2020 is anyones guess. Frankly, I don’t even see why all the anticipatory hand-wringing exists. These major international companies are experts in the field, demand for LNG supply has been locked in, in most cases. What is the issue?

      • Because of the long lead-in time to first gas (up to ten years planning approvals construction liqufaction LNG carrier orders etc) decisions have to be made on best circumstances – no one has the crystal ball. What is known is that Asian countries have expanding energy needs and these will be satisfied in a number of ways, primarily LNG and supply contracts need be secured.

        This is also why it is a timely warning to Australia that the costs of development are amongst the highest in the world and Australia, despite the many attractions of developing in Australia we can not be guaranteed.

        And I agree that no other industry sector can fill the void if resources tanked – something I have consistently reminded those commenters that seem to want the resource sector in the doldrums.

        • it is a timely warning to Australia that the costs of development are amongst the highest in the world

          Our costs of development would be much lower with a dollar at 80c.

          Has that memo arrived yet? Perhaps you should check your inbox. It might have arrived weeks ago.

          • Wouldn’t the costs of development be just as high because of the cost of all the imported equipment and supplies being 20-25% higher, even if it was offset in USD by cheaper Australian labour.

            What is the proportion on Australian content in a major resource project?

    • 3d1k “US is years away from exporting LNG on any scale.” BullS$%T you talk some crap at times on here. Its already happening.

  4. Diogenes the CynicMEMBER

    The cost overruns are the biggest risk. For Gorgon to be 50% over is staggering. Cost blowouts swallow a lot of the potential profits.

    That said the banks will get nervous if they keep reading these articles and that ultimately would kill a few projects. Banks much prefer lending on houses!

    • Half the time cost over-runs are really poor budgeting. But if you were the management that put up the budgets or the board that accepted them, would you ever admit the incompetence in budgeting?

      What proportion of projects come in under budget?

      If budgeting were competent you would expect say 40 to 50%. And how much of the over-run is a result of changes to specifications during the project?

      Anyone who has built a house will no that poor initial budgeting and changes to original specifications are the cause of most of total budget over-runs against the original budget.

      Managements and boards are addicted to action and growth. Remuneration is generally tied to the size of the company (using multiple or alternate metrics) as much as to profit. There is therefore some incentive to budget lightly to get approval and explain the overruns later.

  5. Maybe i am wrong, but as far as i know the banks don’t fund these huge LNG projects, certainly not Australian banks, they are funded solely by the companies themselves and their partners, via the profits from other global producing assets. For example, BG Group funds the QCLNG project, Chevron funds Gorgon, Shell funds Arrow LNG, ConocoPhillips….. etc etc

    Also, the markets for the LNG are already secured, production from these assets are already sold for 20+ years.

  6. You guys need to dig deeper! This whole US shale gas thing is political propaganda!

    1) Shale gas wells only put out 2-300 barrels per day and decline 50% after the first year of production – that means ALOT of drilling = expensive gas.
    2) No pipelines currently exist to move this gas to ports.
    3) Because the US has ZERO LNG exporting port facilities. Only one has been approved so far and the Capex hasn’t even started.

    Expect to see these US projects suffer the same cost blow-outs as seen here in OZ!

    Source: http://youtu.be/h1WW2H95Ckw

  7. The right-wingers in the US are touting shale as if it were the second coming, for instance Niall Ferguson in this interview:

    http://www.cnn.com/2012/11/23/business/america-shale-gas-ferguson-stevens/index.html?hpt=hp_c3

    All the hype, after all, fits so nicely within the right-wing’s “drill baby drill” theology.

    The reality, however, is much less spectacular. Total viable US shale gas reserves are estimated at only 60 Tcf.

    Compare this to the 3141 Tcf of conventional gas reserves that lie in the central Asia-Russia region (Russia, Iran, Turkmenistan, Kazakhstan and uzbekistan). The first phase of the Central-Asia Gas Pipeline, which connects these massive reserves to China, was completed in December 2009. When the second phase is completed the pipeline capacity will increase to 1.4 Tcf per year.

    There’s much, much more going on in the world of new energy supplies than just LNG.

    • Do the environmentalists, including the US EPA, oppose fracking so vehemently because it won’t provide much energy at all, or because it will provide a lot, and they hate that prospect?

      Time will tell re whether the US gas revolution is just “right wing propaganda” or not.

      But I agree on your last sentence:

      “There’s much, much more going on in the world of new energy supplies than just LNG.”

      I recommend Googling “fossil fuels pyramid”.

      The more expensive it is to get to and extract, the more there is of it. We have already won the battle with “peak oil” for decades if not centuries. Technology has already given modern civilisation the means to thrive on $100 per barrel oil and equivalents.

      For example, the cost of running the most economical car today, in real terms, is far lower than the equivalent 40 years ago. This is because incomes have risen; because cars are more reliable and petrol was never the main cost anyway; and because oil was never the main portion of the cost of petrol either. Greenie nutters promising the imminent end of the automobile dependent city are talking out of their posterior orifices.

      • I’m opposed to fracking largely because I don’t believe it can be done safely, and because it provides a short burst of production then declines rapidly.

        We have already won the battle with “peak oil” for decades if not centuries.

        Even if this were true, a century is a mere blink of the eye on geological timescales. The fossil energy we are extracting was created over millions of years. We are extracting it, burning it, and pumping it into the atmosphere at a rate many orders of magnitude faster.

        I assume you a denialist? Don’t answer that. Of course you are…

      • “Greenie nutters promising the imminent end of the automobile dependent city are talking out of their posterior orifices.”

        I agree with your take Phil. However , when these nutters have access to Govt , they tend to use other people’s money to prove their misguided and deceitful point. That process distorts not only the discovery process ofdeveloping more efficient technology for relatively cheap fossil fuels but also wastes taxpayer funds on fanciful obcenely expensive green notions that almost always go belly up anyways.

        Those nutters come at tremendous expense to all of us!

          • Mate, I have no idea where you found Peak Oil below. It’s just about the US NG market. Your bias does rule you, doesnt it?

          • The rapid fall off in production from shale gas applies also to shale oil. Its something the Peak Oilers have been banging on about tirelessly while the IEA spuiks energy independence for the US by 2020.

            Ain’t. Gonna. Happen.

      • PhilBest,

        Yea right. That 60 Tcf figure comes from one of those “Greenie nutter” publications, OilPrice.com, The Number One Source for Oil & Energy News.

        http://oilprice.com/Energy/Natural-Gas/The-Global-Prospects-For-Shale-Gas.html

        And when you make comments like “Time will tell re whether the US gas revolution is just ‘right wing propaganda’ or not” you don’t demonstrate a great deal of knowledge. In fact, you demonstrate a tremenous amount of ignorance.

        The Barnett Shale was the first big shale gas play. It got kicked off in 2001, so the jury’s pretty much in as far as well performance is concerned. The Texas Railroad Commission has done all the work, compiled the aggregate field statistics and production history:

        http://www.rrc.state.tx.us/barnettshale/index.php

        It’s not a pretty picture. To date, 19,105 wells have been drilled. At $5 million a pop, that’s a total investment of almost $100 billion. Through September, those 19,105 wells have produced a cumulative of 12,300 BCF of gas. At the current price of $3.62 per MCFG, that’s $45 billion in gross revenues. From that you have to deduct royalties and operating costs, which brings the take down to less than $30 billion. So the wells are still $70 billion away from payout.

        Only 16,346 wells are still producing. It looks like they’re going to produce about 1.93 Tcf of gas this year. At $3.62 per MCF less royalties and operating costs, that leaves a net of about $4.4 billion. So at that rate, and even if the wells experienced no future decline in production, it would take the wells another 16 years to achieve payout. With the rapid decline in production these wells experience, however, probably very few of them will still be producing in 16 years. At $3.62 per MCF, the companies who drilled these wells would not even get their money back.

        Since these wells decline at a very fast clip, and typically produce half their total lifetime production in the first two years of production, the field will probably struggle to double the 12.3 Tcf that has already been produced.

        These are the kinds of production statistics, and not the fantasies of some fast talking Wall Street broker or right-wing spin doctor, that the 60 Tcf reserve figure are calculated on.

  8. But how to make money? Clearly, demand for US based NG is rising and significantly so. Conversions from coal to gas by power generators is moving at pace locking in many years of steady base demand.

    The fall off rate in existing wells is somewhere between 60-70% in the first year of well life alone. Rig counts for gas plays are falling off a cliff. Links have shown here and elsewhere discussion of the Ponzi scheme going on in shale drilling tenements. Serious concerns continue regarding the environmental impacts of the shale gas industry which will at the least slow down the well establishment process. Add to that the plans to export NG (which will come with supply guarantees for the funding of infrastructure ) and you have all the elements present for a supply shock somewhere down the road IF US production does not meet expectations. I think the low in NG prices is in.

      • Lorax,
        The links 31dk posted a few weeks ago got me stumbling down this path of research. So, in fact this is based on Fossie’s thesis and extracted therefrom. That and I also watch commodity prices rather carefully.

        Reality is always in the price.

        • Reality is always in the price.

          I’ll remember that next time Nasdaq hits 5000, or iron ore hits $200/t, or oil hits $140/bbl.

        • I have to say, it really is quite bizarre to see libertarians and wing nuts reading and quoting what is essentially Peak Oil gospel. I guess you guys will say whatever it takes when it suits your purpose. And if your purpose is to convince us the US shale gas boom will be short lived, you’ll even use Peak Oil arguments.

          I look forward to the day the MineBot is here arguing for (say) Aussie uranium exports to China to help avoid a global warming catastrophe.

          • I like Foss, find her highly intelligent and am prepared to lean towards her views on this topic, as I do with her very realistic assessment of renewal energy prospects.

            Widen your perspective.

          • I have to say, it really is quite bizarre to see libertarians and wing nuts reading and quoting what is essentially Peak Oil gospel.

            Please. I am enjoying the live demonstration of Cognitive dissonance.

          • Please. I am enjoying the live demonstration of Cognitive dissonance.

            No need to make an event of it, you can tune in every day for that. 🙂

  9. An interesting debate. Shale oil was always going to be first cab off the rank as the world ran out of oil – which ultimately it must. Not that it has helped our own would-be frackers much, so far.

    But like everything else, shale is just a stopgap – unless one could, say, locate significant off-earth hydrocarbon deposits and get them back here somehow.

    As to Iraq – well within the hour of war declaration we had a pretty damned good online debate going as to exactly what the US neocons hoped to gain from this apparently insane venture apart from finding someone to kick – with a few flying the “need to test new generation of weapons” flag, others on about how Halliburton would make billions, but almost all of us talking in terms of giving the US a land base in the Middle East from which it could stabilise the Middle East oil flow, lifeblood of the American way of Life. And ultimately we all got the chance to be right, hey?…..

  10. The gathering crisis of global warming will make the mining and exploitation of carbon-based fuels, including coal, a moot point within a decade.

    You can quote me, and hold me to this.

    • R2M: Its completely pointless raising climate change with these people. All of them are denialists, every single last one of them.

      Its so easy to deal with a problem if you pretend it doesn’t exist.

      • Apropos yr comment:

        “The scale of denial is breathtaking.” –Jerry Mander

        “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.” –Kenneth E. Boulding

        “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” — Upton Sinclair (1935)

        “All that is necessary for the triumph of evil is that good men do nothing.” — Edmund Burke

        Author Clive Hamilton, is his book Scorcher, says that one can find the following arguments in the various papers promoted by deniers:

        There is no evidence of global warming.
        If there is evidence of global warming, then it is not due to human activity.
        If global warming is occurring and it is due to human activity, then it is not going to be damaging.
        If global warming is occurring and it is due to human activity, and it is going to be damaging, then the costs of avoiding it are too high, so we should do nothing.

  11. We own about 2 shale processess out of the 50 or so (& 1 of them is defunct). LOL @ peak oil (no such thing, is a constantly renewing resource – basically the earths’ waste.) Also, this is an RE blog where NO1 realises all re manipulation (bubbles etc.) is actually social engineering. Tards.