Japan, S. Korea move to buy U.S. shale gas

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DAEGU, South Korea -- Asia's large-scale gas importers, long saddled with premium prices, say a cheaper alternative lies several thousand feet below North American soil, where companies are unlocking enormous gas reserves from shale rock.

The shale boom has already revolutionized the gas market in the United States and Canada, giving both nations not only a reliable domestic supply, but also the ability to sell overseas.

Asian utility and gas company executives, speaking this week at a global energy forum in Daegu, have said North America's gas wealth could prove nearly as transformative across the world, leading to the first significant West-to-East gas trade and driving down prices in a region that consumes two-thirds of the world's liquefied natural gas, or LNG.

Lower gas prices would be particularly important for Japan, whose utility firms are bleeding money to import fossil fuels while their nuclear plants sit idle. Japan owed its record trade deficit in this year's first half to rising fuel prices, including for LNG coming from Australia and Malaysia.

Japan and South Korea are the world's two largest LNG importers, and both have cut deals in recent months to buy gas from U.S. terminals, in some cases footing some of the development costs. For gas to be exported across the world, it must first be liquefied -- essentially, turned into LNG -- at facilities that cost several billion dollars. That LNG is then shipped in tankers that store the gas at 260 degrees Fahrenheit below zero.

Because of the difficulty of transporting gas -- it is moved either by tanker or pipeline -- it has traditionally been traded only regionally. As a result, there's no global price for gas; rather, there are four or five, and they often differ greatly. Japan and Korea buy gas at $15 or $16 per million British thermal units. But that's nearly twice the rate paid in Europe, and four times the current U.S. rate.

Some analysts and executives say shale gas could potentially be traded at such quantities that it overhauls the way gas is priced globally, establishing a single rate for all regions. Even if that doesn't happen, the inflow of North American gas to Asia will put pressure on traditional sellers, particularly Russia. It will also give new options to energy-hungry nations such as China and India.

"Asian buyers want to realize the day when the convergence of gas prices occurs," said Jang Seok-hyo, president and chief executive of the Korea Gas Corp. "We do not want to pay the so-called Asian premium, and the shale gas revolution will play an important role in narrowing that gap."

If all the proposed or planned American LNG export projects went online today, the United States would have the world's largest export capacity. But the process won't be nearly that dramatic. The United States won't become a net exporter of LNG until 2016, according to the U.S. Energy Information Administration. Moreover, the export facilities need special government approval before they can send gas to non-free-trade nations. South Korea is the only major importer that already has a free-trade deal with the United States.

So far, the Obama administration has allowed four terminals to export to non-free-trade countries, including last month's permission for Dominion Resources to export from its Cove Point, Md., facility. Such approvals are controversial, because a major increase in U.S. exports could cause domestic gas prices to rise. In addition, environmental advocates say the process used to extract shale gas, known as fracking, can contaminate groundwater and cause other forms of pollution.

world

First Published October 15, 2013 8:00 PM


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