Combustible questions for American gas

The US must soon decide whether to use its abundant gas reserves as a source of cheap domestic energy or profitable exports. But environmental issues still stand in the way of both options.

America has been talking about slashing dependence on Middle Eastern oil for decades. Now it is not only looking to slash dependence on the Arab states, but is in the unusual position of debating the merits of energy for export.

How the US develops its enormous reserves of shale and coal gas will be the one of the biggest issues for whoever wins this year’s presidential election. It will help determine the long-term future of Australian LNG and the oil rich Arab states.

The North American shale/coal gas glut has sent prices plunging to $2.50/MMBtu, while the same resource is fetching $15/MMBtu in Asia and $8 to $10/MMBtu in Europe. In traditional terms the business case for exporting looks relatively simple.

The question is whether the US will follow Australia and grab the export cash by converting shale gas to export LNG – something ExxonMobil has just revealed it's investigating – or whether it will use the gas to transform the nation and create jobs. If major US shale gas producers like BHP Billiton can tap the export cash they are likely to be much more profitable than if they have to sell most of their gas into the US domestic market. There is a massive lobbying game ahead.

Frost & Sullivan are global experts on growth situations. Senior consultant Chirag Rathi, speaking to Business Spectator, underlines that the feasibility of the US becoming a major gas exporter is unclear.

"I don’t expect the US to be a very large exporter of natural gas just yet; maybe in five or 10 years time,” Rathi says from Toronto, Canada.

There are important reasons why Australia is fast becoming a serious gas exporter and enjoying the high prices in Asia while America is unable to compete – and so is counting its blessings that cheap, cleaner energy can be harnessed in its own backyard.

"Australia has got a much lower population and much higher resources and your proximity to the big markets, mainly China and Japan and the Asian seaboard in particular,” says Rathi.

As you can see in the map below from the US Energy Information Association, the majority of the shale gas basins in the United States are closer to the east coast. This points more strongly towards European exports, but the region is facing a prolonged period of difficult economic conditions that won’t push up energy consumption. And Russia has a big advantage in supplying Europe with gas and will not welcome the US entering "its patch”.


Canada’s basins are closer to the west coast, which makes exporting to Asia easier. When the Canadian budget was handed down in March, the conservative Harper government committed to streamlining the regulatory process for major resources projects, with Asian exports in mind.

France, which is largely powered by nuclear anyway, would be awkwardly placed to receive US shale gas given that it has banned fracking techniques.

Yet the French opposition on fracking underlines that environmental issues will play a big role in determining how the US energy bonanza is harnessed. Australians were happy to have LNG plants on the remote West Coast and environmentalists were slow in understanding the environmental significance of the big Gladstone region LNG developments. American environmentalists will learn from the "mistake” of their Australian counterparts and will fight LNG developments on the east coast with enormous vigour.

Nevertheless, like, Ottawa, Washington has been inundated with requests from abroad about export LNG terminal permits. Japan is particularly desperate, after the Fukushima Daiichi nuclear disaster wiped that resource from its energy portfolio.

Japanese Prime Minister Yoshihiko Noda raised the issue of US gas exports with President Barack Obama at a meeting between the pair on April 30. However, according to The Wall Street Journal, Japanese officials are resigned to the idea that they won’t get any certainty from the US before the presidential election is decided.

Big neighbour China is actually sitting on estimated shale gas reserves that are three times the size of those in the US, but geologists say the lay of the land makes it more difficult to extract and Beijing lacks the technical expertise – at the moment.

Almost certainly President Obama and his Republican opponent Mitt Romney will debate whether the US should use some of its cheap gas for great overseas profit or just cheap domestic consumption to transform US energy usage patterns – including driving trucks and heavy machinery.

The most logical local use for gas is to replace dirtier coal power plants. As we’ve previously discussed (Global tremors for a US gas explosion, May 4), legendary investor T. Boone Pickens has spoken out strongly against the idea of gas exports on the basis that America should use cheap local energy for competitive domestic purposes.

But even if the US decides against massive LNG plants and goes for domestic consumption it will still need to tackle the environmental issues created by the use of fracking techniques to boost production. We have seen in Australia that fracking techniques can have some undesirable environmental impacts. America is also wrestling with that problem as it weighs up its potential to be a lower-emission, low cost base-load power source against the need for strong environmental regulation.

Just this week, the International Energy Association released estimates that strict regulation of fracking would add just 7 per cent to the cost of production and, under this scenario, gas would become America’s largest source of energy behind oil by 2035.

There’s a strong chance that the 7 per cent estimate turns out to be woefully short, but shale gas would still be viable even if that figure was doubled.

Rathi describes the current state of US environmental policy towards shale gas as very much a "work in progress” and expects the situation to become clearer later this year.

"The EPA (Environmental Protection Agency) was supposed to come up with some legislation last year, but they didn’t,” he says. "Currently they’re still studying a lot of wells and coming out with intermediate reports in terms of whether or not fracking is an environmental hazard.” Rathi adds that many countries are watching to see what the EPA does, whether hopeful importers looking at buying America’s gas or emerging exporters looking for the lead from a well-funded environmental agency.

Whatever the outcome of America’s great gas decision, the situation is a far cry from the start of the last decade. Back then the prospect of a booming local gas industry capable of undermining coal was little more than a pipe dream and the US began setting up 10 to 12 terminals on the Gulf of Mexico as well as the east and west coasts to import gas. Predictably, these projects have been stopped.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles