Energy Price War Spreads to Gas as US Shale Storms Global Market, Stalks Russia
Comment of the Day

February 26 2016

Commentary by David Fuller

Energy Price War Spreads to Gas as US Shale Storms Global Market, Stalks Russia

The US has exported its first shipment of natural gas in a historic move that shifts the balance of power in the global energy market and kicks off a struggle with Russia for market share. 

Surging US supply over the next five years threatens to break the Kremlin's dominance over Europe's gas market, and is already provoking talk of a "Saudi-style" counter attack by Moscow to drive US shale gas frackers out of business before they gain a footing.

At the very least, it sharpens a global price war as liquefied natural gas (LNG) bursts onto the scene, and closes the chapter on the 20th century system of pipeline monopolies. Gas is starting to resemble the spot market for crude oil, with the same wild swings in prices and boom-bust cycles.

A seven-year, $11.5bn project by Cheniere Energy finally came to fruition this week as the first LNG cargo left Sabine Pass in Louisiana - in a special molybdenum-hulled ship at -160 degrees Centigrade - destined for Petrobras in Brazil. "It is a big day for our natural gas revolution," said Ernest Moniz, the US energy secretary.

Speaking at the IHS CERAWeek summit in Texas, he said the emergence of the US as a gas superpower is a geopolitical earthquake, though he has always been coy about the exact intention. "It is a change in the energy security picture," he said.

The US is ramping up LNG exports to almost 130bn cubic metres a day (BCM) by the end of the decade, roughly equal to Russia's gas exports to Europe. This may rise to 200 BCM and possibly beyond as the shale industry keeps finding once unthinkable volumes of gas.

Mr Moniz said the world had been expecting the US to be a huge importer of LNG before the shale shock. The mere fact that this is no longer the case turns the market upside-down, and is a key reason why LNG prices have been in free-fall across the world.

The shift to net exports is something that almost nobody expected. Mr Moniz predicted that the US will match Qatar, and possibly exceed it to become the world's biggest exporter of LNG by 2020. 

The US is still a net importer of natural gas but that is because Canadian pipelines supply New York and Detroit. However, it does not alter the overall picture.

Martin Houston, chairman of Parallax Energy, said the US may account for a quarter of the world's LNG market within a decade, and is so efficient that it can deliver gas to Europe for as little as $5 per million British thermal unit (Btu) despite the high cost of liquefaction and shipping.

David Fuller's view

Here is a PDF of AE-P's article.

This article is well worth reading in full because it is about a monumental development – cheap energy forever – at a time when investors are agonising over China, the EU and negative interest rates.  That is not a misprint; I did say cheap energy forever, thanks to technology. 

Interestingly, there were many forecasts a couple of decades ago that the USA was in the twilight years of its global economic leadership.  It might have been and one could argue that its national governance leaves a lot to be desired.  However, the USA still attracts a significant number of top scientific brains, in addition to those it develops domestically.  It’s institutional and academic structures, entrepreneurial freedom and financial opportunities are second to none.  Consequently, the country has been able to maintain and extend its lead in many crucial scientific programmes.

As a consequence of its increasing leadership in technology, the US has rapidly become a major producer of crude oil.  In the next few years it will also be a significant producer of natural gas. There are more than enough conventional and particularly shale oil and gas deposits in the USA and many other countries to supply global demand for many decades to come.  This is particularly true now that we are seeing an ever more rapid development of renewables, led by solar and wind, which are becoming steadily more competitive. Consequently, the global economy is increasingly benefitting from a long-term trajectory of declining energy costs, enabled by technological innovation. We also have new nuclear which will eventually be followed by nuclear fusion.        

Returning to the present and the challenge of governance, just think what the US economy could achieve during the next eight years with the White House run by a president named Bloomberg!

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