More liquefied natural gas tankers may set sail from the Houston area over the next few years, as several factors combine to make the region a more attractive source of natural gas to meet rising Asian demand.
The price of natural gas, which has been in a prolonged slump since surging shale production boosted supplies, is recovering as gas-fired power plants begin to replace coal plants with higher carbon emissions.
And Macquarie Capital, a corporate financial adviser, reported this month that chokepoints in gas pipelines linking the Midwest with the Gulf Coast could boost the price of natural gas shipped through the Houston Ship Channel more than in other regions of the country.
Starting in late 2015, moreover, liquefied natural gas tankers could start carrying products through a widened Panama Canal. Most such vessels are too big to traverse the canal now.
The Panama shortcut reduces the trip to China, Japan and other Asian markets by 7,000 miles — a major cost-cutter that could give those customers incentive to ship from Gulf Coast ports.
Gulf ports have been courting export customers by offering lower natural gas prices than are available elsewhere on the international market — where the price of natural gas is pegged to the price of oil.
Michael Economides, an engineering professor at the University of Houston, said the Houston region can maintain and sharpen that edge after the Panama Canal upgrade.
“We’re going to end up becoming an extremely rich area exporting natural gas to China and charging them the kind of prices that are better for them,” he said. “Even charging less, you can make a load of money.”
Economides added that natural gas is destined to become the premiere fuel of the world economy because the Chinese government is trying to bolster the country’s use of gas, from 4 percent of the country’s energy needs to 10 percent by the end of the decade.
The big advantage for Gulf Coast liquefied natural gas shippers is that they’ll operate under a more flexible business model than competitors in, for example, Canada, where export projects mostly are sticking to traditional contract models. Those projects are seeking oil-based pricing that has been the norm in the liquefied natural gas business, but Asian buyers are trying to squeeze down that price spread, and the Gulf Coast is going with the flow.
“It’s driving a lot of customers into the arms of Gulf Coast producers,” said Robert Ineson, a natural gas analyst and senior director at IHS CERA.
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Houston’s concentration of oil and gas companies means the local economy reaps the rewards of a more profitable energy industry. Rising oil prices have buoyed the region’s fortunes since the economic downturn five years ago, bumping the city out of recession and into expansion mode faster than almost every U.S. market.
Now natural gas is poised for a comeback across the U.S., charging into the power sector as more coal plants retire in the face of stringent Environmental Protection Agency regulations going into effect in 2015.
The most important development for natural gas prices recently has been a more stable outlook — a far cry from the volatility that drove power plant investors away during the mid-2000s, said Jason Frederick, a senior economist at BBVA Compass.
U.S. natural gas soared above $14 per million British thermal units in 2005, but fell early last year to under $2. It closed at up 6 cents at $3.74 in New York Mercantile Exchange trading Monday.
Woodforest Mackenzie, a Houston-based energy research firm, believes the Gulf Coast will see the strongest appreciation in gas prices throughout the second half of the decade, as exports to Mexico — increasingly hungry for fuel — travel through the region, as well. And though reinvigorated drilling in gas plays could offset a rise in prices, the demand for gas from the market probably will outpace new supply so much that the region will hardly feel the effects.
“In our view, the market kind of pivots at that point from where supply is pushing into markets — which is now reflected in pricing — to a situation in which high-value markets are pulling on supply,” said Jen Snyder, a natural gas analyst at Woodforest Mackenzie.