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Shale can support LNG exports: Chesapeake

May 26 - Shale gas pioneer Chesapeake Energy is confident unconventional gas plays would support proposed US LNG export projects, and believes the US could produce more than 90 Bcf/d of gas at prices are "not that high," a company executive said Wednesday.

"We have a very strong mandate from our CEO to export (LNG from the US)," Bill Wince, vice president of transportation and business development at Chesapeake, said during a panel presentation at CWC’s Americas LNG Summit here.

"If my colleagues and I don’t get LNG exports done, it will be bad for me," he quipped.

Chesapeake last year signed a preliminary agreement to supply as much as 500,000 Mcf/d to Cheniere Energy’s proposed LNG export project in Louisiana, which aims to start exporting in 2015. Chesapeake is also talking to the proposed LNG export project in Freeport, Texas, Wince told Platts on the sidelines of the conference, declining to comment on the relative merits of the two proposals.

Current US production stands at 64-65 Bcf/d, Wince said during his presentation.

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US production predicted to increase According to a study commissioned by Chesapeake based on rig counts, the US could produce more than 80 Bcf/d in a base case and more than 90 Bcf/d in the high case, he said. Those figures do not take into account potential development of new technology, he added.

Chesapeake did not conduct the analysis based on US gas prices, he said but that it could reasonably be inferred that the base case would represent gas prices of $5-$6/Mcf and $6-$7/Mcf for the high case.

The index price for traded May 25 was $4.355/MMBtu, according to Platts Gas Daily. See related price chart: Columbia Gas Transmission in Appalachia Summer 2013 Basis - Jan 28 - May 16, 2011

He provided figures indicating the break-even cost for US shale gas production is lower than the $6/Mcf figure several speakers cited at the conference.

The Marcellus play needs a price of only $2.45/Mcf to provide a 10% rate of return, according to a slide he presented. The Haynesville play needs a $4.25/Mcf price to provide the same rate of return, while the Fayetteville play needs a price of $4.70/Mcf and the Barnett play needs a price of $5.05/Mcf, the slide showed.

"With a price of $6(/Mcf), we would see a lot more activity,” he said.

Current production from four major shale areas is 15 Bcf/d, he said, adding that the advent of low US gas prices in recent years coincided with shale production gains.

During a question-and-answer session, Wince said relatively high shale gas production in the US is "absolutely” sustainable for the foreseeable future. See related news: US LNG export proposals may be too optimistic: SocGen analyst

"We have 59 years of drilling years left in Marcellus,” he said. "It’s similar in all shales.

"One of the great truths about non-traditional plays is they’re long-lasting because they’re so expansive,” he added.

Chesapeake is looking at various pricing arrangements for exporting US-produced LNG, he said.

"We’re certainly comfortable with 20-year agreements and we’re certainly comfortable in different price environments,” he said.

US shale production is greatly reducing basis differentials in the US market, which historically have been caused by transportation costs between producing and consuming regions, Wince said.

"We crush the basis,” he said about Chesapeake, which ranks as the country’s second-largest gas producer, producing 2.7 Bcf/d in the first quarter.

For example, the US Northeast, which traditionally has had among the highest prices in the US during the winter, could potentially send gas to other regions in the country because of shale plays, Wince said.

Some premium US markets lost 15 cents/MMBtu when producers bought long-haul transportation rights to market supplies from the Barnett and Haynesville plays, he said.

The Appalachian market has lost much of its previous 40-cent premium, and New York’s Zone 6 market has lost 25-50% of its premium in the 2015 forward curve because a pipeline is built to supply that market, he said.

It has become difficult to finance construction of new gas pipelines in the US because of declining basis differentials, he added.

A significant amount of LNG import infrastructure was built last decade before the shale boom was well understood, as industry players expected LNG to make up for projected decreases in domestic gas production.

Shale gas crowds out Yemen LNG

Yemen LNG was primarily designed to sell significant LNG volumes to the US, but "the market disappeared,” Jean-Pierre Cave, head of commercial and shipping at Yemen LNG, said at the conference.

As a result, Yemen LNG "re-engineered” its long-term sales agreements to facilitate shorter-term deals to other markets, he said, adding that the ability to re-export cargoes has helped find new markets for supplies.

He declined to elaborate after his presentation.

The US LNG market will recover, he said, adding that "we believe the gas bubble could come to an end sooner rather than later.”

Alaa Abujbara, chief operating officer of commercial and shipping at Qatargas, said that despite the "huge investment” Qatar and its US partners made in building the Golden Pass LNG terminal along the Texas-Louisiana border, "I’m happy shale gas was discovered in America, because it has helped us support other buyers somewhere else.”

The 2-Bcf/d Golden Pass terminal and associated pipeline had a reported cost of $1.9 billion.

Chris Goncalves, vice president of energy consultancy Charles River Associates, said he believes shale gas production will decelerate in 12-24 months, although it would continue to grow strongly. Much of the growth in shale gas production is not strictly related to market forces, but to lease arrangements relating to drill rigs and to producers hedging production to forward curves, he said.

Charles River Associates expects the oil-indexed LNG prices and western spot gas prices to "be divergent for some time,” providing opportunity for proposed LNG exports in the US and Canada, Goncalves said.

European gas prices, which have some linkage to oil prices, could stay $4-$5/Mcf higher than US gas prices, while Asian LNG prices, which are closely linked to oil prices, could maintain a $7-$8/Mcf premium over North American prices, he said.

"We see the US -- all of North America -- becoming an LNG trader, both importing and exporting, to manage imbalances in the market,” he said. "As a net result, we’ll see production increasing and demand increasing. The real question is how much.”

He said he expects the global LNG market, which is now long, to rebalance by the middle of the decade.

Latin American LNG prices are expected to range from $5/Mcf to $10/Mcf, with the low end of that range likely to be seen only in the off-peak summer season, when there is surplus supply, he said.

European LNG prices are likely to range from $9/Mcf to $10/Mcf, as they are more closely tied to oil, he said.

Shale gas discoveries in Argentina could potentially be developed at $7-$8/Mcf, he said, but LNG has "first-mover advantage” over shale plays in regions outside the US, he said.

Based on last week’s ruling by the US Department of Energy authorizing Cheniere to export US-produced LNG from Sabine Pass, Bill Cooper, president of the Center for LNG industry group, said he expects other proposed US export projects to get similar approval.

If other applicants also demonstrate that US LNG exports would not significantly impact the domestic market, "DOE would look favorably” at their applications, he said, adding that he based his conclusion on last week’s DOE ruling.

The ruling also said that if, market dynamics change and the US gas market tightens, DOE could revisit the issue.

Cheniere is still awaiting construction approval from the US Federal Energy Regulatory Commission, and would not build export facilities without first signing long-term commercial agreements.

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