ArticleOil & Gas  Impact of the Natural Gas Fracking in the US to the Asian LNG price
Senin, 18 April 2016
Oil & Gas
Impact of the Natural Gas Fracking in the US to the Asian LNG price
by: Samidi Syabudin, BSc Eng., MBA, PMP, MCCM
Foto Impact of the Natural Gas Fracking in the US to the Asian LNG price

Introduction

Demand of natural gas comes from various industrial, residential, and power generation. Gas is extracted from a fossil source can be found in conventional and unconventional rock such as the tight gas and the shale gas. Since two decades, the shale gas fracking has changed in gas industry, especially in North America. The fracking revolution has increased the production of gas from shale which enables US to meet its gas domestic demand.

In the meantime, the market of gas is different with the oil market which has a single international commodity market. Gas is traded based on regions (United States, Europe and Asia) because of the characteristic of gas investment, handling, and security of supply. If the supply side in one region for example, in the US over stock, can this influence the Asian LNG price?

Fracking Revolution and LNG Shipment

The term of unconventional gas is based on permeability of gas reservoir rock where is the gas trapped in small rock that has very low permeability for gas to flow in the shale rock. According to its permeability, the shale gas rock is lower than 1 microdarcy. Because of its low permeability, lifting gas from shale rock is required different techniques than conventional oil. In order to begin the production the shale gas, reservoir shale rock needs to be horizontally drilled around 7,000 ft under the surface to create well and then the well is fractured. Current technology is Hydraulic Fracturing (Fracking) where is the high pressure of mixed water, sand and chemical injected through the horizontal well to crack the rock shale. The mixed fluid then lifted which allowed some sands left in the fractured rock which provided permeability for gas to flow.

The combination of horizontal drilling and injection has brought a revolution of the "fracking technology". Additional important thing is the natural gas price which is increased because of demand in this decade has brought profitability to extract the gas from shale.

Fracking technology in shale gas production has a characteristic faster Return of Investment which is interested for the investor due to typical life cycle of production stage. Because of potential economic from profit margin and security of energy, the drilling of shale gas has started in the year of 1990 in Texas Barnet shale (EIA, 2011) and follows by other exploration that improving significant of gas production from shale gas in the US. Since to 2005 to 2011, the contribution of gas production from the shale gas has increased dramatically from 0.75 to 7.85 (Tcf) - Figure 1.

Figure 1. Shale Gas contribution to Dry Gas Production in the US


(Source: EIA, 2012)

Until 2012, the majority of shale gas production is dominated by the US with total production around 39% follow by Canada with 15% of the total dry natural gas produced per day in 2012 (Figure 2).

Figure 2. World Shale Gas as Share to Dry Gas Production


(Source: EIA,2013a)

Fracking technology has been significant bring the rush of gas production in the US. Until 2012, export and re-exports of LNG from the US is 1,168.9 Bcf -Figure 3. Japan is the highest export destination of the LNG from US, followed by Brazil and India. Gas industry in the US has made sufficient gas demand in the US and increase the volume of the LNG export to other countries by converted to Liquefied Natural Gas (LNG).

Figure.3 US Natural Gas Export


(Source : EIA,2013b )

LNG Shipment Major Trade movement

According to data from BP Statistical review 2015, Exports of LNG still dominated by Middle East producers such as Qatar, followed by Rusian, Trinadad and Tobago, and other Asia Pacific producers such as Australia and Indonesia (Figure 4).

Figure. 4 Natural Gas: Major Trade movements 2014


(Source: BP 2015)

Data indicated that despite there was a significant gas production in the US. However, the quantity of gas export from the US was not sufficient to influence the domination of Middle East, Rusia & Asia Pacific exporter countries to North Asia (Japan, China, Taiwan and South Korea).

Gas Pricing Model

Unlike oil which has a single commodity market, the market of gas is still traded highly based on the region and distant, not global trade. There are three mainly regional of gas pricing models which are the United States (Henry Hub), Continental Europe (Gas to oil) and Japan/South Asia (Cocktail Pricing). However, Inkpen & Moffet (2011) stated that "United Kingdom has its own version of benchmark pricing in the form of national balancing price (NBP)", considers these regions the gas pricing model shown in Figure 5.

Figure 5. Regional Gas Pricing Model


(Source: Adopted from Inkpen & Moffet, 2011 )

Price characteristic

The price mechanism will apply in the long term contract or spot buying which determine the fluctuation of gas price. Because of its investment and handling characteristics, most of gas is traded in long terms contract rather than the short term. This is to prevent both buyer & seller from disadvantages of the spot buying. Continental Europe and Japan/South Asia linked natural gas to oil price (Gas to Oil). In gas to oil system, natural gas is increased and decreased based on the oil price. While US and UK traded the gas using gas to gas pricing which is very competitive based on spot markets. In this system, the price will be determined by supply and demand of gas competition. Consequently, both systems have volatility in their price but different drivers. Data historical of the price each region (Figure 6) shown that the US gas price has declined until 2012 while Japan, Europe, and UK still increasing since 2009.

Figure.6. Gas Price statistics based region 1997-2014


(Source: BP, 2015.)

Drivers in gas supply and demand

Gas supply and demand is driven by several factors. In supply side, the main factors are the gas production capacity, net import and stock level. In the event of a region is over production, it drives to lower the price. Net import factor is depending on the capabilities of the country to produce gas to meet its domestic demand. The US, for example, continuously reduced in gas import. In the other hand, some European countries tend to increase the gas import. Stock level of gas is influenced by production factor, consumption, exports and LNG processing.

In demand side, gas demand is driven by industry consumption, power generation, and residential. Economic growth will stimulate more industrialization that requires energy for power generation and also gas as feed stock. For residential sector, demand of gas will be increased in the hot summer and long winter because the requirement of power to generate heating and air-condition is increased.

BP statistical,2015 indicated that the production and consumption in the US could cover the region demand but it is very weak to influence the others regions markets (Figure 7).

Figure 7. Natural Gas Regional Production and Consumption


(Source: BP, 2015.)

Impact of Fracking Revolution in the US & Asian LNG price

Data indicated that impact of fracking revolution in the US has increased gas production and sufficient to meet US domestic demand also reduced its net importer position. The gas price in the US (Henry Hub) which linked gas to gas price model has continuously declined since 2008 due to increase of the shale gas production in the US and Canada. Furthermore, US shale gas production provided a prospect for the US to export gas by converting to LNG and trade it to other regions such Asia (Japan, Korean, China) and Europe.

If the Asian buyers would import natural gas from the US for the long term, they have to count cost factors (investment on liquefaction, transportation, and re-gasification facilities). Meanwhile, to export gas from the Gulf of Mexico to Asian Market, the estimated LNG price contract will be as follow:

LNG Price = Henry Hub* 115% + $3/MMBtu + $3/MMBtu
(as estimated shipping cost to Asian market from Gulf of Mexico)

(Source: Mizayaki & Limam,n.d.,p.4).

Using this estimated formula and data from BP statistical review (2015 page 27), US Henry Hub is more competitive when its price is lower than Japan LNG Price by $ 6/MMBtu (see the table below).

Year US Henry Hub
Price(USD)
A
LNG Price Landed in Japan
from US Henry Hub( USD)
B
Japan LNG Price
CIF (USD)
C
Difference
(USD)
(B-C)
2005 8.79 16.10 6.05 10.06
2006 6.76 13.77 7.14 6.64
2007 6.95 13.99 7.73 6.26
2008 8.85 16.17 12.55 3.63
2009 3.89 10.47 9.06 1.42
2010 4.39 11.04 10.91 0.14
2011 4.01 10.61 14.73 -4.12
2012 2.76 9.16 16.75 -7.58
2013 3.71 10.26 16.17 -5.90
2014 4.35 11.00 16.33 -5.33

(Source: author calculation based on BP statistical review data,2015)

Conclusion

It is suggested that fracking technology in the US increased the LNG shipment, could potentially influence the gas price in the US which based on gas to gas competition. However, the impact unable to reduce the price in the other region or change the other regions existing pricing model that link gas to oil. In view of quantity, the shale gas not sufficient to influence the world supply and demand. The economic factors to export the gas will not be attractive for some regions because of significant processing and transportation cost associated with shipping of LNG. Finally, fracking revolution in the US is unable to reduce the price in Asian LNG market.

References:

  • EIA,2011. Technology drives natural gas production growth from shale gas formations. Available Online: http://www.eia.gov/todayinenergy/detail.cfm?id=2170
  • EIA,2012. What is shale gas and why is it important?. Available Online:
    http://www.eia.gov/energy_in_brief/article/about_shale_gas.cfm
  • EIA,2013a. North America leads the world in production of shale gas. http://www.eia.gov/todayinenergy/detail.cfm?id=13491
  • EIA, 2013b. U.S. Natural Gas Imports & Exports 2012.Available Online: http://www.eia.gov/naturalgas/importsexports/annual/ and http://www.eia.gov/naturalgas/importsexports/annual/#tabs-supply-2
  • BP,2015. Statistical Review of World Energy 2015. Available Online.
  • Inkpen , A and Moffet, M.H.,2011. The Global Oil and Gas Industry Management,Strategy & Finance. Oklahoma, Penwell
  • Miyazaki, K. and Limam,M. n.d. Will LNG Exports from North Amercia /East Africa Drive Global Price Integration. Available Online: http://www.gastechnology.org/Training/Documents/LNG17-proceedings/3-6-Kyoichi_Miyazaki.pdf
Profil Penulis
Foto Samidi Syabudin, BSc Eng., MBA, PMP, MCCM

Samidi Syabudin, BSc Eng., MBA, PMP, MCCM

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