Energy
US LNG imports put pressure on struggling domestic producers
By Sheila McNulty in Houston

Published: May 26 2009 05:25 | Last updated: May 26 2009 05:25

US imports of liquefied natural gas have almost doubled since the start of the year, putting pressure on a domestic market already hit by weak demand and falling prices .

Yet the string of massive global production projects feeding this rise in imports have only just begun to come online, so the flood is expected to grow.

The poor state of the global economy has left the natural gas with no place else to go. “The US can act as a sink,” says Jon Wolff, analyst at Credit Suisse Equity Research.

The US has abundant storage facilities, but the amount piling into that storage already is higher than its five-year average, so it may well all be full by the autumn.

This sets the stage for acute pressure on already low domestic natural gas prices, which have fallen from just over $13 per million British thermal units in July 2008 to less than $4 today.

“There’s too much gas in the market,” says Nikos Tsafos, analyst in PFC Energy’s upstream and gas group.

Many domestic companies have stopped drilling, pushing the rigs in use down more than 50 per cent in recent months and setting some producers on the edge of bankruptcy.

Because most US drilling is done by small companies, with fewer than 20 employees, many have little or no cashflow and no available credit to continue drilling.

Moody’s Investors Service issued a report in May listing the 13 exploration and production companies it covers that have weak borrowing base support.

This is crucial to operations, as banks use annual reviews of company debt to cut permittable levels below existing borrowings.

Among them were Brigham Exploration, which is nearly fully drawn; Delta Petroleum, which has had to reduce its bank debt; Energy Partners, which has had its borrowing base reduced; and Dune Energy, which is selling assets.

Chesapeake Energy, one of the biggest gas producers in the US, has said that it is plugging some production.

If others follow that lead, it would help ease the oversupply in the market and would support natural gas prices.

But LNG flooding in to take its place will continue to worsen the oversupply picture, putting further downward pressure on domestic natural gas prices.

“US production has to come down to stabilise prices,” Mr Tsafos says. “[But] LNG imports are going to complicate that.”

Michael Newport, chief executive of Mainland Resources, a small oil and gas exploration and production company, says the industry hopes US natural gas prices will recover to $7 or $8 per million BTU next year, though some are predicting a fall to $2.

Regardless, he will continue drilling to capitalise on the uptick in the US economy, when it comes.

With thousands of small natural gas producers across the US, the country is almost completely independent in natural gas, with about 85 per cent of the natural gas used in the US produced in the country.

Many find it disturbing that foreign producers of LNG are gaining a foothold in the US.

When Gazprom, the state-run Russian natural gas company, said this month that it would import 20m tons of Russian LNG into the US, the Independent Petroleum Association of Mountain States objected.

“The US is awash with domestically produced natural gas,” says John Harpole, president of Mercator Energy and a member of the association’s board.

“Flooding a market with a foreign product when prices are already low has proven disastrous in the past,” he adds.

But the trend is poised to continue. With huge LNG projects in Russia, Yemen, Indonesia and above all in Qatar expected to start up this year, there is a flood of LNG coming on to the market.

Murray Douglas, an analyst at Wood Mackenzie, the consultancy, says that developers may not be bringing projects online with the same urgency as they would have, had prices been at last year’s highs.

However, they are still moving forward, as any delays will adversely impact the economics of their projects. So the flood of LNG to the US will continue.

Mr Tsafos forecasts that US imports of LNG will more than double by the year-end, while some are predicting as much as a five-fold increase.


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