China and India see what the US doesn’t – the potential of natural gas

By: Sheila McNulty

The Financial Times – ft.com/energysource

This has been a busy week for US natural gas. It started off with the US signing an agreement to help India exploit its shale gas resources during President Barack Obama’s visit to that country. The agreement mirrored one the US had signed with China some time back to also help that country make the most of its shale.

These are both striking agreements because they demonstrate that other countries see tremendous potential in natural gas. And yet the US government has failed to appreciate the expertise and experience that launched the global shale gas scramble is in its own backyard. The US gas boom has generated so much capacity in America that prices have collapsed.

If a significant portion of the gas were being used, or at least the US government had a solid plan to incentivise its use, prices would not be so low. But without the recognition by the Obama Administration and Congress that this is a major resource – far cleaner than oil or coal – that could be used not only to power the country for years but reduce carbon emissions at the same time, US gas prices will have no support.

And that brings me to the next development. Cheniere Energy has signed an agreement with ENN Energy Trading of China, under which ENN will contract 1.5m tonnes per annum of bi-directional Liquified Natural Gas (LNG) processing capacity at Cheniere’s Sabine Pass LNG terminal in the US. This makes the possiblity of the US exporting its gas to the rest of the world that much more likely to happen. As gas is liquified for ease of use during transport.

Once again, it is China that sees the potential. ENN Energy Trading is a subsidiary of ENN Energy Holdings, one of the biggest independently owned natural gas operators in China.

Here is a bit more detail from the press release:

Under the MOU, ENN Energy Trading and Sabine have agreed to proceed with negotiations of definitive agreements for ENN Energy Trading to contract capacity for a primary term of 20 years with mutually agreed extension terms, subject to certain conditions precedent, including but not limited to Sabine’s receipt of regulatory approvals and making a final investment decision to construct the liquefaction facilities, and ENN Energy Trading reaching a final investment decision to construct an LNG receiving terminal.

And here is what Cheniere’s chairman and chief executive, Charif Souki, had to say about the deal:

We are excited to participate in supplying natural gas to China and we believe that ENN is a successful model for developing diverse solutions to serve its fast-growing energy markets. ENN Energy Trading is an ideal customer that is expanding its natural gas distribution network and seeking new sources of natural gas supply in order to increase its customer connections and increase its sales volumes. We look forward to working with ENN Energy Trading and proceeding with definitive agreements.

It is not that nobody in the US sees the potential. Last year ExxonMobil, the US’ biggest oil company, bought XTO Energy in a $41bn deal that demonstrated its belief in the future of gas. And this week Chevron, the second biggest US major following Exxon, followed with a much smaller, but, nonetheless, symbolic deal underlining its interest in US gas. Chevron agreed to spend $4.3bn to buy Atlas Energy, which has a strong position in a key shale field in Pennsylvania. George Kirkland, Chevron’s vice chairman, explained its interest:

We are acquiring a company that has one of the premier acreage positions in the prolific Marcellus. The high quality resource, competitive cost structure in the Marcellus, strong growth potential of the asset base and its proximity to premier natural gas markets make this targeted acquisition a compelling investment for Chevron. The Atlas Energy assets further advance Chevron’s global shale gas position, complementing the company’s recent entrance into shale gas opportunities in Poland, Romania and Canada.

While Chevron and Exxon demonstrate the interest US majors have in the country’s gasfields, they were late to the table. Europeans and Asians have been eagerly snapping up acreage for several years now. Indeed, Cnooc, the Chinese energy company, in October agreed to pay up to $2.16bn to buy a 33.3 per cent interest in Chesapeake’s Eagle Ford shale play in the largest Chinese investment in the US energy sector. That deal must be reviewed by CFIUS, the Committee on Foreign Investment in the US. And PFC Energy, the consultancy, noted the review will come during a period of rising tensions over Chinese industrial openness and currency manipulation. It warns:

The outcome will be dependent on the political negotiations between the Chinese and US as the US tries to use China’s interests in US shale to negotiate support on Iran.

PFC notes that Cnooc has been cautious about investing in the US since its failed Unocal bid in 2005, which sparked a major backlash in Washington. Nonetheless, it notes that the company will undoubtedly frame the Chesapeake Energy patnership as a “win” for the US, bringing much needed capital to the Eagle Ford gas field. Cnooc, the consultancy says, is probably counting on Chesapeake to push the deal through the regulators by positioning it under the US-China Shale Gas Resource Initiative to promote collaboration and raise China’s environmental standards. Yet PFC concludes that Cnooc may yet again find itself embroiled in US politics:

In a politically divided Washington, one of the few issues with bipartisan Congressional support has been to attack China on a host of economic and political issues… In an example of what is to come, the United States in recent days has opened an investigation into subsidies being provided by China for its clean energy industries, and it could easily and conventiently target Cnooc’s investment next. One potential issue the CFIUS could use to fault Cnooc is the company’s investment in Iran, which translates into a threat to national security if Cnooc were to pass on any technial knowledge gained in the United States to the Iranians.

PFC raises a lot of good points. There are many reasons the US could move to stop the transfer of expertise to China and other countries, for that matter. But it remains unfortunate that it does not list among them the recognition by the US government that it must keep these resources at home for domestic use. Unless the US government sees the value in using its own gas resources, it seems likely the expertise, technology, talent and gas, itself, will slowly flow out of the country.

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