Monday, February 13, 2012

More on a New, Emerging World Energy Map

With America's abundant supply of natural gas selling at close to historic-low levels, it seems natural that the next step would be to export it, and that's exactly what's starting to happen.  A Wall Street Journal article today features one natural and growing market for natural gas, Japan, which has almost doubled its imports of natural gas since 1995, and by 12% in the last year.  Following last year's earthquake and tsunami, Japan has closed 51 of its 54 nuclear and electric utilities have switched to natural gas.
And we can expect increased demand for natural gas from other countries in Asia and Europe, as some countries like Germany are moving away from nuclear power.  

From the WSJ article:

"The growing demand for natural gas around the globe coincides with a transformation of the U.S. market for the fuel thanks to the unlocking of gas in long-untapped shale formations. Officials in Washington expect the U.S. to turn into a net gas exporter over the next few years.

Exporters can take advantage of a gaping price difference. In the U.S. natural gas goes for about $2.50 per million British thermal units. The price in Japan for the same quantity is about $16."

MP: Drill, drill, drill = cheap natural gas = exports, exports, exports

HT: Bob Wright

21 Comments:

At 2/13/2012 11:37 AM, Blogger Jon Murphy said...

The only initial stumbling block on this road is natural gas is very difficult to export, what with having to liquefy it, getting export permits, and the like. I'm sure this will be overcome, but we should temper our short-term expectations of natural gas exports.

 
At 2/13/2012 11:46 AM, Blogger Mark J. Perry said...

Jon: Yes, all of those points are made in the WSJ article.

 
At 2/13/2012 11:57 AM, Blogger Benjamin said...

Now Mark Perry says the goods import-export picture is important?

I liked the old regime, where we printed up money and gave it to foreigners in exchange for goods and services.

Thanks to a lower dollar, now we actually have to trade some goods to get some goods. Does that help US employment?

Interesting questions.

 
At 2/13/2012 12:09 PM, Blogger Unknown said...

I have a hunch all this talk about exporting LNG from the US to the rest of the world is going to fall flat on its face. There are so many gigantic natural gas reserves being discovered and developed all over the world, I have a hard time believing the rest of the world will want or need the US's natural gas. They're starting to discover that China has huge shale gas reserves, and I don't even want to begin to think how much shale gas Russia will eventually discover. Plus, they're discovering huge natural gas fields off the coast of Australia, Mozambique, Israel and elsewhere. All of these other places are closer and more convenient to the usual import markets of Europe and Asia than the US and Canada are. By the time the US develops decent LNG exporting infrastructure, all these other places will already have their feet in the Europeans' and Asians' doors.

 
At 2/13/2012 12:16 PM, Blogger Benjamin said...

Unknown-

I think you could be correct.

And in a larger sense: Motor vehicles can run on CNG, LPG or methanol. (Methanex sells methanol for about $1.30 a gallon now).

High mpg cars running on natural gas presents a much different picture than the Peak Oil Doomsters predict.

 
At 2/13/2012 12:39 PM, OpenID moneyjihad said...

I'm sick of "tempering our expectations."

Why do we have to accept lengthy permitting processes, environmental studies, logistical excuses, political red tape, etc?

This is America! Let's consistently vote for people who will simplify & rush these processes.

 
At 2/13/2012 1:07 PM, Blogger juandos said...

"Why do we have to accept lengthy permitting processes, environmental studies, logistical excuses, political red tape, etc?"...

Exactly moneyjihad...

From CEI: Ten Thousand Commandments

The cost of federal regulations (aka interference) that burden the private sector and increase the costs of goods and services to the citizens...

 
At 2/13/2012 2:12 PM, Blogger Jon Murphy said...

Yes, all of those points are made in the WSJ article. And that's what happens when you skim the article :-P

I'm sick of "tempering our expectations."

As much as I agree with you, we need to temper our short-term expectations, The solutions you propose, as correct as they may be, are medium- and long-term solutions, none of which will help the current situation immediately. That's all I mean by tempering expectations.

 
At 2/13/2012 6:26 PM, Blogger Che is dead said...

"The only initial stumbling block on this road is natural gas is very difficult to export, what with having to liquefy it ..." -- Jon Murphy

Methane and natural gas are usually shipped around in pressurized pipelines and canisters. But chemists have now developed a new way to transport the gases: as a powder.-- Chemists create 'powdered methane', Nature

"... the ultimate resource is human ingenuity and the human imagination coupled to the human spirit, which is infinite ..." -- Mark Perry

 
At 2/13/2012 7:37 PM, Blogger juandos said...

Hey che thanks for linking this really interesting article...

 
At 2/13/2012 10:15 PM, Blogger VangelV said...

Officials in Washington expect the U.S. to turn into a net gas exporter over the next few years.

Officials in Washington expected the housing boom to keep going. How did that work out?

Exporters can take advantage of a gaping price difference. In the U.S. natural gas goes for about $2.50 per million British thermal units. The price in Japan for the same quantity is about $16.

The break even cost for shale gas coming from the most promising areas is around $7 per MMBTU. I don't see how producers can sell it to exporters for $2.50. And given the depletion rate for shale gas wells how can anyone sign a long term contract at a fixed price?

Obviously there isn't much thought given to this issue. Liquefying natural gas from marginal shale projects that chew up through capital does not seem to be a very viable idea.

 
At 2/13/2012 10:17 PM, Blogger VangelV said...

Why do we have to accept lengthy permitting processes, environmental studies, logistical excuses, political red tape, etc?

Because that is America! Americans consistently vote for people who will get in the way of free markets.

 
At 2/13/2012 10:21 PM, Blogger VangelV said...

Methane and natural gas are usually shipped around in pressurized pipelines and canisters. But chemists have now developed a new way to transport the gases: as a powder.-- Chemists create 'powdered methane', Nature

LOL... I have been looking into ways to mine methane hydrates from the ocean bed while you are citing a paper that argues that we should be producing them. If we could handle methane hydrates that easily why transport any gas from the US? The sea around Japan has plenty of methane hydrate deposits that are just sitting around waiting for someone who can bring them up to the surface.

 
At 2/14/2012 5:22 AM, Blogger Larry G said...

looks like there might be some "casualties" ..or is that "creative destruction"?

Chesapeake Energy's New Plan: Desperate Measures For Desperate Times

 
At 2/14/2012 10:04 AM, Blogger VangelV said...

looks like there might be some "casualties" ..or is that "creative destruction"?

Chesapeake Energy's New Plan: Desperate Measures For Desperate Times


How about that. Who could have guessed that management was serious about the 'funding gap' that it was talking about during the conference calls? And who could have ever guessed that selling natural gas at a loss was not a good business model?

And if oil shale were such a good idea why would the company try to less its undeveloped acreage in the Permian basin? You would think that the optimists would have noticed the shale problem by now and used their knowledge of economics to raise the red flags. Instead they are ignoring the crisis and spinning new narratives about FUTURE profits in shale liquids. How long till that scam is exposed?

 
At 2/14/2012 10:36 AM, Blogger Jason said...

= jobs, jobs, jobs

 
At 2/14/2012 12:03 PM, Blogger Jet Beagle said...

Benjamin: "Now Mark Perry says the goods import-export picture is important?"

Where does he say that? I can't find it anywhere in the post you are commenting on.

I doubt that Mark Perry has changed his position that the trade deficit is irrelevant.

 
At 2/14/2012 1:08 PM, Blogger Che is dead said...

"I have been looking into ways to mine methane hydrates from the ocean bed while you are citing a paper that argues that we should be producing them. If we could handle methane hydrates that easily why transport any gas from the US?" -- Vag

No doubt we will be exploiting methane hydrates some day, but that entire process will require technologies that need to be developed and carefully tested since no one currently knows how stable the sea floor is around these deposits. When we do start to exploit them, we will probably be using drilling technologies - depressurization, thermal stimulation, solvent injection - of the sort that "peak oil" and anti-fracking morons, like you, currently deride as an economic scam, requiring more energy to employ than they produce. And, depending on what form the methane takes when retrieved, it may be transported using methods currently being developed. Speaking of LOL.

 
At 2/14/2012 1:54 PM, Blogger Che is dead said...

"And if oil shale were such a good idea why would the company try to less its undeveloped acreage in the Permian basin? -- Vag

Precisely because shale oil is a good idea and those properties are currently sought after:

"Chesapeake ought to fetch top dollar for its Permian assets because they are about 80 percent oil at a time when crude is averaging $100 a barrel, Cabla said. “With oil prices at these levels, this is probably the best time to be getting out of the Permian,” Cabla said. “The Permian is one of the hottest regions right now” for acquisitions." -- Bloomberg

The Permian represents about 5 percent of Cheseys proved reserves. The company has only recently expanded its shale oil program in order to offset the capital costs associated with its shale gas plays.

For someone who claims to know so much about the oil and gas industry, you seem to know very little about how government leases work. In order to maintain a claim, companies are required to drill regardless of the market price of gas and oil at the time. As a result, companies often spend huge amounts of money upfront, sometimes capping wells when prices are low, while hoping to sell their resources in the future. This is what is happening in the shale gas industry:

"... the company has $10 billion in debt to service and is obligated to keep drilling wells on newer oil and gas leases in order to hold the land ... A gift for financial engineering is part of the genius of Chesapeake Energy Chief Aubrey McClendon. For years he has driven Chesapeake hard and fast to gobble up oil and gas acreage across the country. To keep his land machine running, McClendon has continuously raised more cash from joint ventures, spin offs and by issuing debt. This wouldn’t have been a problem if gas prices just cooperated by staying around $5 or $6 per thousand cubic feet. Yet Chesapeake and other drillers have found so much new gas that what used to look like a bonanza has now turned into a glut." -- Forbes

Perhaps, Chesey bought too many leases and focused too much capital on gas plays, shifting to oil too late. Only the future will tell. But whether or not a company, like Chesey, survives is irrelevant to the economic viability of shale gas and oil as a resource.

 
At 2/14/2012 4:35 PM, Blogger VangelV said...

No doubt we will be exploiting methane hydrates some day, but that entire process will require technologies that need to be developed and carefully tested since no one currently knows how stable the sea floor is around these deposits. When we do start to exploit them, we will probably be using drilling technologies - depressurization, thermal stimulation, solvent injection - of the sort that "peak oil" and anti-fracking morons, like you, currently deride as an economic scam, requiring more energy to employ than they produce. And, depending on what form the methane takes when retrieved, it may be transported using methods currently being developed. Speaking of LOL.

You just made my point. Storing methane as hydrates in order to transport it is many years away because the technology is not yet in place. By the time it is most of the shale gas producers will be out of business.

The problem for Mark and the optimists is very clear. Anyone who has been on the conference calls should have heard management talk about the financing gap problem and about the negative cash flows. Many of the companies that I have listened in on have stated that they will cover the financing gap by selling more assets and by adding to their debt. But some of these companies have been around for quite some time. Others have been working in what should have been the sweet spots of decent formations and were able to sell forward production at good prices but still would up losing money. Now we are supposed to wait five years for LNG to drive up demand and lift prices? Sorry but in the real world selling product at a loss leads to bankruptcy.

 
At 2/14/2012 4:53 PM, Blogger VangelV said...

"Chesapeake ought to fetch top dollar for its Permian assets because they are about 80 percent oil at a time when crude is averaging $100 a barrel, Cabla said. “With oil prices at these levels, this is probably the best time to be getting out of the Permian,” Cabla said. “The Permian is one of the hottest regions right now” for acquisitions." -- Bloomberg

This is the same thing we were hearing about its natural gas properties. How did that work out?

The Permian represents about 5 percent of Cheseys proved reserves. The company has only recently expanded its shale oil program in order to offset the capital costs associated with its shale gas plays.

Of course, the company is most optimistic about the properties that it knows least. That has not been a winning strategy so far.

For someone who claims to know so much about the oil and gas industry, you seem to know very little about how government leases work. In order to maintain a claim, companies are required to drill regardless of the market price of gas and oil at the time. As a result, companies often spend huge amounts of money upfront, sometimes capping wells when prices are low, while hoping to sell their resources in the future.

I know this. That is why I pointed out before that if Aubrey had his way he would only have one or two drills turning and would not be chewing through capital to keep the leases. It is why I pointed out to Mark that the gas increase tells us nothing about profitability.

This is what is happening in the shale gas industry:

"... the company has $10 billion in debt to service and is obligated to keep drilling wells on newer oil and gas leases in order to hold the land ... A gift for financial engineering is part of the genius of Chesapeake Energy Chief Aubrey McClendon. For years he has driven Chesapeake hard and fast to gobble up oil and gas acreage across the country. To keep his land machine running, McClendon has continuously raised more cash from joint ventures, spin offs and by issuing debt. This wouldn’t have been a problem if gas prices just cooperated by staying around $5 or $6 per thousand cubic feet. Yet Chesapeake and other drillers have found so much new gas that what used to look like a bonanza has now turned into a glut." -- Forbes


This is not new. It has been what I have been pointing out for more than a year to counter the hype from Mark and the shale promoters.

Perhaps, Chesey bought too many leases and focused too much capital on gas plays, shifting to oil too late. Only the future will tell. But whether or not a company, like Chesey, survives is irrelevant to the economic viability of shale gas and oil as a resource.

Of course it is. Chesapeake is the poster child of the shale gas industry and pretty representative of its fortunes. It knows more about producing shale gas and oil than most of the industry. It had access to capital. It had the reputation. And it still could not manage to make any money. That was not because everyone got stupid or unlucky. It was because the total energy investment was too high for the energy produced to be economic.

And let me note that none of the articles have scratched the surface yet. The analysts have yet to look at the overly optimistic EURs and the real production decline curves. When they do and adjust the depreciation costs accordingly most of the industry will wind up uneconomic.

 

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