Natural Gas: Shipping LNG will not solve America's supply glut
Friday, 27 January 2012 | 00:00
As the price of Natural Gas continued its free fall through last week, resulting in lows not seen since 2002, it’s no surprise that the price environment has chipped away at the big producers. Chesapeake Energy (NYSE:CHK) tipped its hand today, stating that it would pull back on its drilling activity by half and reduce production by 8% on account of low natural gas prices.
As the price of natural gas continued its free fall through last week, resulting in lows not seen since 2002, it’s no surprise that the price environment has chipped away at the big producers. Chesapeake Energy (NYSE:CHK) tipped its hand today, stating that it would pull back on its drilling activity by half and reduce production by 8% on account of low natural gas prices.
Normally, this kind of white flag waving would result in a punishment from a market that hates the word “reduction,” but the response this morning has been overall positive. As if to breath a sigh of relief, the market seems to be rewarding Chesapeake for its self-realization and the pull back, resulting in a 5% bump as of publication.
Couple this announcement with a warning from Exxon Mobil (NYSE:XOM) that it would cut spending on drilling gas wells, and the message is getting clearer: Even the biggest players can’t keep up with these economics.
Though the announcement of a slightly reduced supply of natural gas gave the commodity a small boost this morning, there is still a long road ahead for gas prices to return to an economic level. Long gone are the days of the 80s and 90s where profit could be made from $0.85/mcf and parties were had over $1.50/mcf. Today, with the effective, but expensive, process of horizontal drilling plus multi-stage fracturing has skewed the economics of natural gas in North America, for what seems like forever.
But, some feel that there’s a saviour on the water. A mad scramble to tie-in to the world’s biggest pipeline, the ocean, has been launched by some of the biggest dry gas players looking to shop their wares. In the United States, multibillion-dollar propositions have been made by Cheniere Energy (AMEX:LNG) to convert import terminals into liquid Natural Gas docking stations in both Louisiana and Texas for liquidation and export of dry gas. In Canada, a team effort between Apache (NYSE:APA), EOG Resources (NYSE:EOG) and Encana (TSX:ECA) (NYSE:ECA) has been proposed to connect Canadian natural gas to the world via an LNG export terminal at Kitimat, BC.
Why shipping LNG will not solve America's supply glut
While world natural gas prices are fetching upwards of nearly $20/mcf in places like Japan, even the $8/mcf being seen in places like Poland and the Ukraine are profitable for producers who are seeing sub $3/mcf prices here in North America. But, even if the world gets piped into North America’s gas, this doesn’t fix the price scenario on the whole. Expectations on LNG are slightly over-hyped, because the capacity to ship can’t possibly match the supply glut this continent is in.
There’s a lot of time between now and the expected opening date for the Kitimat terminal, which is slated for 2015. And when it comes online, the capacity limits are 5 million metric tons of LNG per year, or the equivalent of 255 billion cubic feet of natural gas per year. To put this into perspective, Chesapeake just cut 182.5 billion cubic feet per year, which would be nearly 72% of the Kitimat capacity. That’s right, the cut of 8% of Chesapeake’s production represents almost three quarters of the entire LNG facility’s capacity.
Sure, there is a saviour on the water, but it won’t be everyone’s saviour. Thus, we’re going to see a lot more of these pullbacks in the near future from primarily dry producers, and a movement into liquids to save face and step into today’s reality of cheap gas and expensive drilling.