Why shale gas is great news for LNG

Shale looks like LNG’s nemesis – on the surface at least. Look harder. It sure killed THE big hope of the LNG world – namely the prospect of the US becoming a premium LNG buyer. But this also has jump-started LNG as a fuel.

For all the first-time visitors of this blog, I am a big fan of LNG as a fuel for – well everything. Big deal. But there was always a hitch. Namely, the little problem that there was never enough LNG around to satisfy the world’s thirst for combustible liquids.

No more. In other words – the stuff (natural gas) was always there. We just could not get it out of the ground economically. And that is what has changed now. The US-pioneered shale gas boom has left the world awash with recoverable gas reserves. And since the genie has left the bottle, there are new shale gas discoveries announced every month or so.

Now, isn’t that bad news for LNG as shale gas destroys the premiums LNG needs to thrive? I say “No, it’s not” and here is why.

The LNG world is beset with several afflictions. Let’s bring out one of the more egregious – Anti-competitis. It is believed that LNG cannot thrive in a free market environment without the plush earnings afforded by monopoly markets like those in Asia. LNG project planners cry out that without guaranteed returns for 20 years, nobody will sign up for an LNG project anymore.

If one takes a look into what’s on offer, there is no surprise. Look at those costs! Any common sense has gone out of the window a long time ago. Any other industry would manage to bring costs down and quality up over time. Only LNG plants seem to get more and more expensive the further technology advances. The current Australian projects are just the most egregious of the bunch but that does not make the others money savers. LNG plant building will have to become much cheaper and much more reliable. As long as the good old ways work well – nobody changes and the bad old ways slog on.

So, it’s a good thing that shale has crushed some comfortable little certainties LNG project sponsors liked to revel in. Those with high CAPEX exposures (equals high costs) are the losers. Those who manage to bring those numbers down again will win out. LNG as an industry wins in the end as it gets leaner, better, and more competitive.

Let’s take another affliction – hypoerbolis. Does anybody remember that the US was supposed to become the biggest LNG-consuming market just a couple of years ago? Or how many times was LNG declared a liquid commodity without showing the slightest signs of liquidity? Or the Asian miracle (which did not feel quite so miraculous for Asians) which was declared to last forever.

We are used to this hubris in the energy world but LNG has taken it to a whole new level. As soon as someone seems to have a supposedly great new idea, everyone jumps on it and the initiator is decorated like a Soviet general. There are voices of reason but they are drowned out quickly and as sure as I write this post someone will come out of the woodwork and write a big cheque.

Sure, shale gas has produced its hype and the hyped phantasmic US LNG buying market swiftly became the great North American LNG export miracle. How about that? Shale had killed one hype to give rise to another one. Like every hype, this one will fade into thin air. I have already spat fire and poison on this “grand new idea” in another post.

There are more voices for reason around now. The scars from the last couple of hypes are still fresh and some important players in the LNG world are still trying to get to terms with the consequences of the last bubble popping.

What’s much more important is the gas price being so low in North America now as a result of the shale revolution. This has opened up a price spread of staggering proportions between Middle Distillates and Natural Gas. Now, at last, the dogs of cost-cutting and squeezing profitability out of fleets have raised their heads.

Natural Gas being the cleanest hydrocarbon around never stood a chance on those merits alone against the comfortable Middle Distillates as long as the price spread was modest. People simply don’t adopt something new just because it’s cleaner when it’s just a bit cheaper. But once Diesel costs many multiples of Natural Gas and is as expensive as it is right now, people start to look for anything that eases their pain.

That’s what happens to LNG right now. It has become popular in North America because it’s so much cheaper than Diesel and because it’s still reasonably comfortable to use.

LNG was used as a fuel for a long time, let’s be clear on that. We hardly talk about cutting-edge technology. But as long as it does not make the mass market, it always remains something of an oddity out there and hence expensive as anything odd is by its very nature.

LNG becoming a regular, frequently used fuel means also that an element of mass production hits it. It’s not only converting diesel vehicles anymore. Specific LNG models are being developed even further widening the spread with diesel. That means standards, that means lower prices, that means normality, that means LNG sheds its image as the cold brew of some black wizard. And all that because shale gas happened and made North America aware of how great this fuel is (at least price-wise).

America is first but China has a burgeoning “LNG as a fuel” movement of its own. This one will also be further fuelled by shale gas happening in this country. And for the first time in history, LNG has become a major fuel for shipping in the Baltic Sea. With those big examples, the world will take note and start flipping over to LNG altogether.

That’s a long shot, I know but the beginning has been made.

Shale gas has probably hastened the death of the traditional LNG world but as much as I will be crucified for it, that was a good thing. I have never understood why LNG stuck to its old model for such a long time.

Killing some classical import markets will free up much LNG over the next decade and producers will have to think hard about new ways to derive some profit from it. LNG as a fuel will hit them as a solution and that will further boost this market.

Let’s face it. If all the world flips over to LNG, there will have to be an awful lot more of the stuff to go around. We simply don’t have any available to regasify it in large installations to swell pipelines. LNG is just Natural Gas, that’s right. But as a fuel, it becomes a product in its own right as the liquid form has properties the gaseous one cannot possibly match.

Shale gas provided the coup de grace to old, unexciting LNG. And it kicked new super hot LNG into existence. It gave LNG a sparkle it never enjoyed before. That’s what friends do.