Are U.S. plans to ship LNG to China over-optimistic?

LNG Tanker
Source: DollarPhotoClub

With gas and oil prices down, many shale producers are looking towards liquefied natural gas (LNG) – the exports of which, they hope, will boost the prices of American hydrocarbons. Their optimism, however, might turn out premature if – as Kurt Cobb writing for the Oil Price portal predicts – Russian’s supply of gas to China drives prices down so much that American LNG exports will cease to be profitable.

In recent months Russia has signed two major gas deals with China – altogether preparing to send up to 100 billion cubic metres (Bcm) of gas to the energy-hungry country. America is also eyeing China as a potential recipient of its LNG but, as China is working hard on diversifying its energy sources, selling shale gas to the Asian giant might not be easy.

The first problem with shale gas is that it’s far more expensive to explore than conventional resources. According to Ken Medlock, Senior Director of Rice University’s Baker Institute Center for Energy Studies, the profitability of shale wells vary, with some wells profitable at $2.65 per thousand cubic feet (mcf), others at $8.10 per mcf, and the median being $4.85 per mcf.

On top of that baseline price requirement, there are the costs of transporting the gas to a liquefaction plant, turning it into LNG, transporting the LNG on specially constructed tankers, regasifying it and delivering it to the point of consumption. Kurt Cobb calculates that this multi-phased process of delivering the LNG to Europe or Asia will cost about $6 per mcf. Adding to that the cost of shale gas extraction at $4.85 – Cobb calculates it at $6 per mcf – the price of American LNG will be somewhere between $10.45 and $12 per mcf.

The most recent landed prices for LNG to Asia as reported by the Federal Energy Regulatory Commission were $10.10 per MMBtu for China, $10.50 for Korea and $10.50 for Japan. For Europe the numbers are even more sobering: $9.15 for Spain, $6.60 for the United Kingdom, and $6.78 for Belgium. This puts into question the profitability of American LNG exports.

There is also the question of how much gas China will in fact need. Speaking at the recent EAGC conference in London, Vladimir Drebentsov, Vice President, Economics and Corporate Social Responsibility, BP Russia, said that even Russian gas – delivered by pipeline and cheaper than LNG – is not totally competitive in China, which also relies on cheaper imports from Central Asia.

That’s not even taking into consideration China’s vast shale gas deposits, which at 1,115 trillion cubic feet (tcf) are the largest in the world. Admittedly, China is yet to unlock this vast potential – with difficult geology, scarcity of water, and skills shortages making exploration difficult – but China has pulled out all the stops in the race for shale and is likely to finally succeed.

In September this year, China Petroleum & Chemical Corp., otherwise known as Sinopec, announced that it intended to invest $3.5 billion in shale gas drilling in order to reach its goal of producing 3.5 billion cubic meters of gas by 2015. Not to be outdone, PetroChina Co. has announced a target output of 2.5 billion cubic meters in 2015 after investing $1.37 billion.

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