The United States has significantly increased its natural gas production since 2005, largely because of advancements in extraction technology. These technological improvements are relatively new, so their exact long-term impact on U.S. production is currently unclear. However, in the short term, this increased production has caused domestic prices to decrease substantially.
To remain profitable, U.S. companies are making plans to begin exports in the form of liquefied natural gas (LNG), which could lead the United States to become a net exporter of natural gas in the next few years. With prices for natural gas higher in East Asia and Europe, the United States can use these exports as an effective economic and political tool.
Natural Gas in the United States
The United States is the world's largest producer and consumer of natural gas. It produces more than 600 billion cubic meters (bcm) of natural gas annually, but it still needed to import almost 100 bcm in 2011. Beginning in 2005, domestic natural gas production began steadily increasing, and according to projections by the U.S. Energy Information Administration, production will increase by an average of about 1 percent per year through 2035. However, these projections are likely too conservative, having been calculated using production numbers from 2010 and before and thus not having fully taken into account a significant increase in relatively new methods of natural gas extraction from shale formations.
From 2006 to 2011, shale gas production increased by about 50 percent in the United States; by 2010, it accounted for one-quarter of all U.S. natural gas production. Shale gas extraction has been aided by new technologies that have helped exploration and production by lowering operating costs and allowing access to previously untapped formations. These include methods such as hydraulic fracturing, where oil or natural gas deposits are extracted from fractures in underground rock formations, and horizontal drilling, which increases the surface area of a given well in contact with the shale formation. Hydraulic fracturing demands a significant amount of freshwater — approximately 4.5 million gallons per attempt — which the United States has in abundance.
As a result of these new technologies, domestic natural gas prices have decreased rapidly as production levels have risen. The benchmark price of natural gas in the United States was about $88 per thousand cubic meters (mcm) March 2, down from about $135 per mcm the previous year and much lower than the prices in the European markets ($409 per mcm) or Japanese markets ($589 per mcm). Low natural gas prices are harming U.S. domestic producers, which need prices to hover around $140 per mcm to remain profitable.
Moreover, natural gas is not the only commodity being extracted from shale formations. Shale oil production in the United States has also seen an increase in production in recent years, and any associated natural gas from oil ventures is sold at prices producers of pure natural gas would consider a loss. The rapid rise in production means accurate numbers are difficult to obtain, but most sources indicate that natural gas associated with shale oil production accounts for 10-40 percent of all natural gas production.
Several other U.S. industries are also affected by lower natural gas prices. Natural gas fuels approximately one-quarter of U.S. electricity generation, an amount that is expected only to rise as the country moves to decrease dependence on coal. Natural gas is also used as a base material for numerous manufacturing operations in the petroleum, plastics and chemical industries, and anywhere from 5 percent to 15 percent of these operations' expenses can be attributed to natural gas costs.
Lower natural gas prices could prompt manufacturing plants to remain in or move to the United States for production, as evidenced by Dow Chemical Co.'s recently announced intent to build its first new U.S. plants since 2001. Royal Dutch Shell announced in 2011 plans to build a new plant in the Appalachian region. Additional interest to increase production in the United States has been expressed by numerous other companies, including Formosa Plastics Corp., Chevron Phillips Chemical Co. and Occidental Chemical Corp.
Obstacles to Exporting
If production continues to increase beyond any increasing demands, the next logical step would be to start exporting natural gas, but this presents a logistical problem. The simplest way to transport natural gas is via pipeline, and while the United States has pre-existing natural gas collection and distribution systems for relatively easy domestic transport, its physical separation from markets in Europe and Asia, where the cost of natural gas is higher, makes exporting to those regions difficult.
LNG is one option for export, but the United States currently has only one, small, old liquefaction plant, inconveniently located in Alaska. At least seven new sites have applied to the Department of Energy to be allowed to liquefy and export natural gas, and two of these, in Freeport, Texas, and Sabine Pass, La., could be partially online by 2015 or 2016 and have a maximum combined exporting capacity of approximately 30 bcm per year. New liquefaction plants are costly — the Sabine Pass facility is expected to cost $6 billion — but higher market prices abroad will help companies recoup their initial investment sooner.
The planning and construction of an LNG export facility can take anywhere from three to seven years, though delays are likely. Concerns over the environmental impact of the LNG plant and associated infrastructure threaten to delay the start of construction for a facility in Jordan Cove, Ore., and with five of the seven planned facilities being located on the coast of the Gulf of Mexico, there is the potential for hurricane damage to delay the construction process. Even without delays, full export capacity will not be reached for years.
LNG exports are by necessity limited to countries with the capability to regasify the product, but the construction of import terminals is on the rise. Approximately 20 new LNG import facilities currently are under construction worldwide, most in East Asia and Europe. Cheniere Energy Inc., the owner of the Sabine Pass export facility, has already signed export contracts with India, South Korea and Spain, and recent reports have indicated that Japan is interested in procuring natural gas from the Freeport site.
The LNG market currently makes up approximately 30 percent of the overall internationally traded natural gas market and its share is expected to grow. Japan is by far the largest consumer of LNG in the world, and demand is increasing as the country attempts to diversify away from nuclear power. Japan currently is paying more than $450 per mcm, the profit margin of which more than makes up for the transport costs of the long journey from a Gulf of Mexico liquefaction facility.
Europe is also a viable market for new LNG exports as countries such as Germany move away from nuclear energy and the Netherlands, Poland and Lithuania build new regasification facilities. Europe could see U.S. natural gas as an attractive alternative to that of Russia, which currently uses its large market share in the European natural gas supply as political and economic leverage.
The success of LNG exports is dependent on the continued success of shale gas and oil production, but the United States has overcome the technological obstacles to efficient production from these fields. While these technological improvements are new and it is thus difficult to predict their exact long-term impact on U.S. natural gas production, evidence suggests that the United States will become a major LNG exporter in the near future.