Just when you think it can’t get any worse in the natural gas industry, it does.
A glut of gas in the United States as a result of lower demand because of the Great Recession and greater than projected production from the gas shales of Texas and Oklahoma has driven natural gas prices below $5 per million British thermal units (BTUs). Natural gas closed at $4.85 on November 30.
Commodity traders, though, have started to get optimistic that a recovery economy would need more natural gas. Enough more to push up prices in 2010. Wall Street projects that natural gas prices will hit $6.09 per million BTUs in 2010.
But that optimism arrives just in time to get killed by a surge of natural gas imports from countries such as Qatar and Algeria.
Those countries have extremely low production costs and they ramped up construction in 2002 to 2008 of new liquefied natural gas plants for turning natural gas into a liquid that can be sent to U.S. and other overseas markets by ship. During that period natural gas prices were high and seemed headed higher. As a result of those new plants now coming on line Qatar will increase its annual liquefied natural gas production capacity by 43% by the end of 2010.
Add that to a U.S. natural gas industry where production is at its highest level since 1974 and the wonder is why gas prices, as high as $13 a million BTUs in 2008, aren’t even lower.
Unfortunately, for other producers Qatar is the world’s most efficient producer—even after you tack on the cost of liquefying the gas. Qatar can pump a million BTUs of natural gas for just 15 cents. That compares to about $4 per million BTUs for overseas competitors such as Norway and Russia, according to the International Energy Agency. Add another $2.83 per million BTUs to liquefy the gas and you’ve got a total production cost of just $2.98. That’s low enough to undercut Norway, Russia, and even most U.S. producers.
No wonder that U.S. imports of liquefied natural gas are projected to increase 34% in 2009, according to the U.S. Department of Energy, and to jump another 40% in 2010.
That’s good news for anyone who heats a house with natural gas or any company that uses natural gas as a feedstock to produce, say, fertilizer or plastics.
But that projection almost guarantees another year of pain for U.S. natural gas producers.