Energy Ink

Chinese shale gas could undermine LNG market

March 14, 2012

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Take a hard look at China, Ian Nathan, a senior research analyst and specialist in global natural gas, LNG and national oil companies at Energy Intelligence in New York, urged a morning audience at an Arctic oil and gas conference in Calgary yesterday.

The market widely viewed as a sop for excess North American natural gas supplies is not a “bottomless sink” capable of absorbing limitless volumes of liquefied natural gas sold at premium prices, he said. “That window for Asian LNG exports may not be open indefinitely.”

He cited LNG cargoes previously bound for North America that have been displaced thanks to U.S. domestic shale gas production, plus future imports from Russia, as liable to lead to more gas-on-gas pricing in the Middle Kingdom. “A lot of gas needs to find a home,” Nathan said, pointing to forthcoming tankerloads from Australia and Mozambique, among other places. “That market that everyone’s thinking about needs to be looked at very, very carefully.”

It is a theme echoed by researchers at the Baker Institute in Houston. In a paper released late last year, authors Ken Medlock and Peter Hartley noted that rerouted LNG cargoes previously bound for American shores have presented European buyers with alternative suppliers besides Russia, while “exerting pressure on the status quo of indexing gas sales in both Europe and Asia to a premium marker determined by the price of petroleum products.”

The link, combined with bargain basement North American gas prices, underpins a suite of LNG export schemes taking shape on Canada’s West Coast. In an Alberta Oil interview last year, Apache Canada president Tim Wall stressed that long-term contracts with Asian buyers would offset any shift to gas-on-gas pricing the region experienced.

Observers say future negotiations could be complicated if China, which has yet to produce any commercial volumes of shale gas and faces chronic water shortages, manages to parlay the technical know-how acquired via overseas joint ventures into a viable domestic industry. “That market you’re targeting could be undermined,” Nathan said.

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