US set to be big buyer of gas from Middle East

Study says Gulf sales lost to American output will recover.

The US will emerge as the second-biggest market for Middle Eastern natural gas exports in two decades if a uniform global market for gas continues to develop, according to a new study by the Massachusetts Institute of Technology (MIT). The forecast counters the prevailing view in the gas industry that the recent spike in US domestic output could permanently close the door to large-scale imports. Multibillion-dollar US import terminals for liquefied natural gas (LNG) are sitting dormant while Qatar, Algeria and other major exporters scramble to find alternative markets willing to pay higher prices.

But US domestic reserves, although abundant, will eventually prove more expensive to develop than buying some LNG from overseas, the MIT study said, projecting that by 2020 the US would be likely to import as much as 9.8 trillion cubic feet of gas per year, up from 3.7 trillion cu ft last year. That would meet 35 per cent of US consumption. Imports from the Middle East in particular could increase to 4.4 trillion cu ft, from virtually nothing last year.

"The US could become a substantial net importer of LNG in future decades," the MIT study said. "For reasons of both economy and global security, the US should pursue policies that encourage an efficient, integrated global gas market with transparency and diversity of supply, and governed by economic considerations." The study underscored the significant uncertainty about the costs of shale gas production, in which oil companies use high-pressure water, chemicals and horizontal drilling to unlock gas reserves that had previously been considered inaccessible.

"There's no doubt that it's a huge resource, but you need to look at the cost curves. That's what really means something, the cost for the resource," said Ernest Moniz, the director of the MIT energy programme, during a visit to Abu Dhabi last month. "The US is awash in gas. Nevertheless, we would predict significant imports starting in 20 to 25 years, because the fact remains that there is still a huge amount of conventional gas in the world that costs next to nothing to produce."

The bad news for Middle East exporters is that - barring a significant policy change that places a penalty on carbon pollution - prices in the US market are unlikely to rise much above today's depressed levels of US$4.84 per thousand cu ft. The MIT study assumes a price of $5.70 in 2030 without any climate policy changes, and a price of $11.40 if the government puts a high financial penalty on fossil fuels.

MIT's multi-year studies on the costs of energy sources, such as nuclear energy and coal, are considered industry benchmarks. The latest study envisions a near-quadrupling of Middle East exports to meet increased global demand for gas. In addition to the exports to the US, the forecast sees the region exporting 4.9 trillion cu ft of gas to east Asia, which is already its biggest market, and 4.1 trillion cu ft to Europe.

That increase in output would require the exploitation of huge gas reserves in Iran and Iraq whose development have been hindered by political and security considerations, as well as new export facilities in Qatar, where the government has imposed a moratorium on further development of the country's North Field. Because natural gas is a cleaner-burning alternative to oil and coal, global demand for it is expected to grow significantly in coming decades, MIT said. But the increase in exports will occur only if the market for gas becomes steadily more like the oil market, where spot prices and short-term futures replace long-term fixed contracts.