Monday, February 03, 2014

Pricing and Exporting North American Natural Gas For Asia

The investor relations community works hard to convince analysts like Yours Truly that junior exploration companies in North America have good prospects.  One premise for making this case is the Asian energy market's willingness to pay for cheap North American natural gas.  The IEA's 2013 report "Developing a Natural Gas Trading Hub in Asia" notes that the Asian gas market is not fully responsive to supply and demand fundamentals.  That will change as more producers move to meet demand.  The USDOE's EIA natural gas page shows how the price of gas has recovered nicely from its drop two years ago, and that demand from exports is projected to remain strong.

Gas exports from the US and Canada must travel via liquified natural gas (LNG) ocean carriers.  There are no gas or oil pipelines under the Pacific Ocean; subsea transport of petrochemicals via pipeline over anything other than short distances presents insurmountable technical obstacles.  Canada has taken an aggressive approach to building LNG infrastructure that can serve Pacific Ocean carriers.  The US lags behind, with fuss over the Keystone XL oil pipeline demonstrating the anti-infrastructure mentality of very ignorant pressure groups.  The National Energy Board of Canada still requires export approval but I fully expect that to be reduced to a formality once more Pacific coast LNG infrastructure is complete.   The "pick and shovel" plays for pipeline operators and construction firms operating in Western Canada will be compelling for years.

Forecasting the future price of natural gas is more difficult than forecasting either demand or supply.  Demand can be derived from population growth and energy use per capita.  Supply is a function of capex spent to counter decline rates in well-known geology.  Pricing is different due to all sorts of random factors, including political news, accidents, and weather conditions.  I do not typically pay attention to price forecasts from private firms like PIRA or IHS CERA.  They are valuable in the market because preppie investment bankers hire them to do work they are not smart enough to do themselves.  A more intellectually honest approach would use the NG market price and figure its probability of mean reversion.  This admits the ambiguity of commodity prices, and justifies the hedging strategies all producers use.  EIA reports the NYMEX prices and CME Group prices Henry Hub natural gas futures with this reality in mind.

I do not know the specifics of import requirements that Asian governments set for natural gas.  The US federal coordinator for Alaska natural gas states that Asian market favor wet gas, with more ethane and other liquids to raise the gas' heat content.  A Google search of other Asian content requirements reveals a preference for "sweet" gas with a lower hydrogen sulfide content.  The booming Bakken shale fields are notorious for producers who flare off NG because they have no pipelines or storage tanks to capture it.  That will change as Asian demand moves the NG price far enough to drive such investment.

There's big demand in Asia for natural gas.  The US and Canada have big supply.  Together the twain shall meet.  It's only a question of transport cost, terminal liquefaction (and regasification) services, and content regulation.  Actually, that's several questions, with multiple sub-questions in each one.  The shale drilling boom in North America marches on.