Shale Gas, Fracking, Atlantic LNG and Ticking Clocks

24 October 2014


As at Friday,24 October 2014

What is Shale Gas?

Shale gas is natural gas trapped inside its original shale source rock. It is described as an unconventional gas because it has no visible migration path and requires further processing before it can flow from the shale that encases it.

In the past decade the technologies of horizontal drilling and hydraulic fracturing have been combined to exploit and extract shale gas and oil in the United States. This combination of technology is often referred to as “fracking.

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What is “fracking”?

The process of fracking involves pumping a mixture of water, sand, and chemicals into shale formations containing hydro carbon deposits at high pressure. The process fractures the shale rock and releases the oil and, or gas for processing.Fracking is not without its critics since it can result in large emissions of methane into the atmosphere, requires significant amounts of water as a process consumable, and can lead to significant contamination of groundwater supplies and surrounding soil areas.
Fracking requires significant investment in capital equipment and raw materials, and in relative terms is an expensive source of oil and natural gas.
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A game changer for Atlantic LNG?

At the turn of the millennium exploited shale gas amounted to less than 1% of the United States natural gas supply, and the country as a whole was a significant importer of liquefied natural gas (LNG). The largest exporter of LNG into the USA was Trinidad and Tobago serviced from the Atlantic LNG plant in Point Fortin.By 2010 the picture had changed significantly. On the back of significant exploitation of domestic shale gas the United States had become self-sufficient in natural gas removing the need to import large quantities of LNG.Shale oil and gas really is a potential game changer for the United States. So large are the deposits of shale oil and gas that at current levels of demand and prices it is estimated that the recoverable shale gas supply could meet domestic demand for natural gas for the next 60 to 80 years. It has even allowed the United States to enter the export market for LNG – possibly as early as the fall of 2015 – when Cheniere could begin exporting LNG from its plant at Sabine Pass.Consequently over the last five years the percentage of Atlantic’s LNG output exported to the United States has fallen from historical levels of 90% to less than 20% in 2013.

Why it hasn’t mattered to Atlantic LNG so far

Atlantic LNG has managed to diversify and vary its portfolio of customers, and is currently exporting to over 21 countries worldwide. A large proportion of its production is sold under long term contracts the details of which are not in the public domain. However it has successfully managed to export cargos under spot contracts in the Far East, and in recent years has significantly increased the volume of shipments into South America at attractive spot prices – at least in recent times- of reportedly as high as $15 per mmBtu.The source of demand for Atlantic LNG’s product may have changed dramatically but the world still has a huge appetite for LNG. Of greater importance, export of LNG continues to drive growth in Trinidad and Tobago’s GDP and export earnings.

Will it matter in the future?

In the short to medium term the demand for LNG worldwide is very likely to continue to exceed the supply. Atlantic LNG’s plant in Point Fortin has a proven track record of delivering product and the number of potential customers is increasing.China is constructing a number of new facilities to receive LNG and has promised to increase the consumption of gas (currently less than 5% of China’s energy consumption comes from gas) and reduce its reliance on the burning of high carbon emission fossil fuels – primarily coal- in an effort to reduce its output of greenhouse gases.The Panama Canal expansion project, due for completion in 2015, will make the shipment of LNG at spot prices from Point Fortin to Asian markets considerably more attractive. The upgraded facilities will allow 80% of the world’s LNG fleet to pass through the Panama Canal opening a considerably shorter route from the Caribbean into Asian markets (effectively reducing transit time by 18 days).There is a potential spanner in the works. China has significant amounts of Shale Gas and its exploration has been listed as priority in the 12th Five Year Plan covering the period 2011 to 2015. Despite Chinas intention to frack, demand for LNG is likely to remain high and in any event Chinas ability to frack on a large scale will be dependent on its willingness and capacity to commit large quantities of scarce water resources to extraction.

Natural Barriers to Entry

Construction of new LNG plants is an expensive process with costs climbing significantly since the construction of Atlantic LNG’s four trains. New plants in the region would only be guaranteed and constructed on the back of both the availability of new gas and the existence of long term contracts to take product.Politics aside, this should place Atlantic LNG in the box seat in respect of the development of the Loran Manatee field shared between Trinidad and Tobago and Venezuela. In volume terms Loran Manatee is expected to yield enough natural gas to fuel two LNG trains for up to 20 years.

Atlantic LNG Logo

 

 

 

Why is Atlantic LNG so important to Trinidad and Tobago?

The economy of Trinidad and Tobago is dominated by the hydro-carbon industry. In 2011 hydro-carbon resources accounted for over 45% of its GDP, and 82% of its export receipts. Atlantic LNG is the major and significant contributing component of this industry sector.From 2000 until 2006 the high growth in GDP recorded by Trinidad was largely attributable to increased
energy prices and the expansion of LNG exports primarily to the United States. Despite a fall in US Exports and a global recession in 2008 Atlantic LNG has continued to contribute to GDP and export receipts by finding alternative markets for product at attractive spot prices.

Of course it may never happen that way

Oil prices have dropped significantly from a high in June of $115 per barrel to $86 per barrel as at the time this blog entry was written. If prices continue to fall, fracking may become an unattractive option as the costs of extraction will exceed the revenue that can be generated on a per barrel basis. Part of this fall can be attributed to increased supply (from the United States, Libya and Iraq in particular) and part from a slowing of demand in Europe and China. OPEC could in theory fix this by agreeing to constrain output but there is no current consensus that this will happen. This is a subject area that we will explore in our next blog entry because it has significant consequences for our neighbour Venezuela.

Ticking Clocks

Despite continued exploration and the discovery of new fields, Trinidad and Tobago’s supply of oil and natural gas is inevitably finite. The challenge remains managing the remaining years and creating a viable plan for a future. In the short to medium term LNG will remain a significant factor continuing to drive the economy forward.

The clock is however ticking…

 Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.633.4638, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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