The Permian Can Help Satisfy China's LNG Appetite
Global liquefied natural gas (LNG) demand could exceed available supply by up to 150 million tons per annum (mtpa) by 2025, and planned LNG projects outside North America could supply roughly one-third of that shortfall.
So says the top executive of a company developing a South Texas LNG export project and associated natural gas pipeline.
"This leaves approximately 100 mtpa of new liquefaction capacity that must be developed and built in North America," said Matt Schatzman, president of CEO of NextDecade Corp., in an April 26 keynote address to the CWC China LNG & Gas International Summit in Beijing. "We believe most of this new capacity will be built on the Gulf Coast of the United States."
Next Decade's projects include:
The 27-mtpa, six-train Rio Grande LNG export terminal in the Port of Brownsville, Texas
The Rio Bravo Pipeline, which would transport up to 4.5 billion cubic feet per day of natural gas from the Agua Dulce supply area near Corpus Christi to Rio Grande LNG.
Highlighting the United States' growing prominence in the global LNG market, Schatzman told conferees that U.S.-sourced LNG could represent approximately 19 percent of available supply by the end of next year. He believes that figure could hit 32 percent of available supply by 2025.
"We are in the early stages of a prolonged period of structural demand growth in LNG," Schatzman said. "In 2017, the global LNG market had grown to 290 mtpa, or by nearly 19 percent since 2015. We now have more than three dozen countries importing LNG around the globe."
Much of the growing appetite for LNG is coming from China, where demand grew by nearly 50 percent year-on-year in 2017, according to Schatzman. Moreover, NextDecade anticipates that Chinese demand alone could surpass 80 mtpa by 2025 每 making it the world's top LNG market.
Plentiful Permian Associated Gas
According to Schatzman, much of the new LNG volumes destined for China could originate as associated gas produced in the Permian Basin of Texas and New Mexico. NextDecade asserts that the Permian may hold nearly 500 trillion cubic feet of natural gas at breakeven prices below zero dollars.
Schatzman reasons that the production economics of the Permian's prolific Midland and Delaware component basins are tied to oil, not natural gas, production. Moreover, he points out that state regulations in Texas and New Mexico prevent associated gas produced from these basins from being flared off on a long-term basis.
That translates into abundant, low-cost feedstocks that could supply coastal liquefaction plants for decades.
"The Permian Basin could supply more than 50 years of gas at breakevens below $0, even if natural gas production in the Permian grows to more than 25 billion cubic feet per day, enough to feed multiple incremental LNG projects along the Texas Gulf Coast," the executive said at the CWC summit.
"Under these conditions, Permian producers must find a market for the associated natural gas to enable oil production," Schatzman said. "This, in turn, drives down the breakeven economics of the natural gas to extremely low levels. In fact, this drives down the breakeven economics to levels below $0."
The very low breakevens do not mean, of course, that producers would actually give away the associated gas or pay someone to take it away.
One of Schatzman's colleagues further described the $0 breakeven economics. The basis at the Waha gas hub demonstrates the significantly discounted price of Permian gas compared to the benchmark Henry Hub price, explained Patrick Hughes, NextDecade's vice president of corporate strategy and investor relations. Also, he said the and oil-based production economics suggest associated gas is produced at breakeven economics below $0 assuming a $60 West Texas Intermediate (WTI) oil price.
But Then There's the Issue of Takeaway Capacity
To be sure, getting associated gas out of the Permian is not without its challenges.
"Limited takeaway exists to transport Permian Basin gas to market," continued Hughes, adding that the least expensive and most viable option is moving it eastward from the Waha gas hub in the Permian to the Agua Dulce or Katy trading hubs near Corpus Christi and Houston, respectively. He cited the Kinder Morgan-Targa Midstream Gulf Coast Express pipeline project, which will run from Waha to Agua Dulce, as an important solution to the Permian takeaway puzzle. Sempra and Boardwalk's proposed Permian-Katy Pipeline would also provide relief for Permian associated gas producers.
"MidCon is already pushing gas south, California gas demand is not increasing, and Mexico does not solve the problem," said Hughes.
What about moving Permian associated gas farther eastward across the Sabine River into Louisiana, where additional second-generation LNG export projects are underway?
"The LNG projects in Texas offer an advantage to Permian producers in that 每 to get the associated gas to an export market 每 they can access LNG projects in Texas for less transportation cost," Hughes said.
In addition to the extra cost of shipping gas greater distances, a pipeline traversing a state border would become an interstate 每 rather than intrastate 每 conduit and would fall under a different set of regulatory requirements, Hughes continued. Also, he pointed out that a pipeline transiting around aquifers near San Antonio paralleling the Interstate 10 corridor near Houston and Beaumont would demand the use of thicker-walled pipe and more compression.
Beyond the U.S. Gulf Coast, what might a customer in Asia expect to pay for that abundant, low-cost Permian associated gas converted into LNG? Hughes contends that a range of $7 to $8 per million British thermal units (MMBtu) is realistic. He said this range reflects the full value chain and includes the cost of the associated gas, pipeline shipping costs in Texas, the cost of liquefying it at Rio Grande LNG and shipping it from Texas to China via the Panama Canal or around the Cape of Good Hope.
"This landed price is not fixed 每 the liquefaction fee is the only fixed part of the equation 每 but meant to show, illustratively, how competitive U.S. LNG projects 每 and especially those on the Texas Gulf Coast, like our Rio Grande LNG project 每 are relative to historical norms," concluded Hughes. "To be able to land gas in Asia 每 long-term 每 for between $7 and $8 is extremely competitive."