Summary
Exxon Mobil (XOM) will start up another three Liquefied Natural Gas (LNG) projects in Qatar this year. Despite not needing it, the U.S. could be a magnet for LNG cargoes. LNG joins the regional markets just as demand falters. Some 28% of internationally traded gas was in the form of LNG in 2008. With the recession plus the development of unconventional natural gas resources in the U.S., the entire world is now oversupplied. For XOM, the natural gas liquids produced in the Qatari projects result in a break-even price for LNG of zero. Such gas can be landed in the U.S. for less than $2/million btus. That compares with a current NYmex price of $4/million. The U.S. with a large LNG market will be a natural destination for surplus cargoes. The average U.S. natural gas field requires a Nymex price of $7.79/million to earn a 10% rate of return. Natural gas drillers' capital expenditures outpace their cash flow. Why haven't XOM and others scooped up distressed companies?
Analysis
The basic truth is that severe, long-lasting financial crises, like the one crushing world markets today will fundamentally change established business practices. Commodity producers today are searching frantically for ways to bring prices down. In this environment, LNG comes into its own. Extraction costs of LNG are coming down even as those same costs for crude oil are still rising and likely to continue doing so. International majors spend research and development funds to find ways to lower all energy costs. But the focus has been on LNG, all the more so in the face of a threat from the shale gas drillers. Global crude oil consumption declined by 0.6% in 2008. Global natural gas consumption increased by 2.5%. That was below its 10-year trend line caused by the general economic downturn. With the price of all categories of natural gas continuing to fall, demand for it will inevitably increase. Year by year natural gas claims a greater and greater share of the transportation fuel market. Now, LNG is forcing all natural gas prices lower which can only increase demand for it. The longer the world is in crisis, the greater will be the shift from expensive liquid fuels to the various forms of inexpensive compressed natural gas (a technology in steady technological flux). As a group, the international major oil companies exert immense control over LNG. They are well-positioned to continue driving the prices lower with ever-increasing volumes brought to markets everywhere. As their research and development brings down the cost of shale gas extraction and as the shale gas drillers, strapped for cash, are driven to the wall, then and only then will they be liquidated in detail.
