Marcellus Shale Gas May Head Overseas
Pittsburgh Tribune-Review
10 April 2011
By Lou Kilzer and Andrew Conte
Drilling companies rapidly expanding their U.S. operations in places
such as Pennsylvania's vast Marcellus shale formation repeatedly tout
they are providing American jobs and securing the nation's energy
future.
Yet, a Tribune-Review
examination found foreign companies are buying significant shares of
these drilling projects and making plans for facilities to liquify and
ship more of that natural gas overseas.
A leading player in the natural gas grab is China, whose thirst for
energy to fuel its industrial explosion is growing rapidly. Others
include the governments of South Korea and India, and companies in
Great Britain, the Netherlands, Norway, Japan and Australia.
"They're going to come in, extract all this stuff for next-to-nothing,
and make global profits off it," said Pittsburgh Councilman Doug
Shields. "This is beads for Manhattan, in a global sense."
Much of the salesmanship to promote gas exploration nationwide, and
especially in Pennsylvania, pressed the point that the country must
become less dependent upon foreign energy sources.
It avoided discussion about exporting that gas overseas.
“The implications are great,” said Paul Cicio, president of Industrial
Energy Consumers of America, which represents large U.S. manufacturers.
He believes exporting newfound natural gas is a strategic blunder that
will cost American manufacturing jobs by hiking the price of gas here.
"This is not good for our country,” he said.
Bill Newman, a New York lawyer who often represents foreign clients,
sees things differently. “We have a shortage of capital in this
country,” he said.
“In the 19th century, the railroads almost broke us.” He said he
believes foreign investment in the United States can work like it did
in supporting the railroads.
Patrick Henderson, senior adviser on energy matters to Gov. Tom
Corbett, said the possible export of Marcellus gas overseas “doesn't
hurt the argument that we need to develop the resource.” He said it
underscores that the United States needs to develop technology that
uses natural gas.
“Exporting is generally a good thing, though our first choice would be
to use it here," he said. Corbett doesn't believe Pennsylvania should
tax Marcellus shale gas aimed for overseas because it would be
difficult “to craft a tax” based on where the gas is used, he said.
The relatively new technology called hydraulic fracturing, or
“fracking,” to free gas from deep shale formations is helping America
move from importing natural gas to potentially supplying it to the
world.
Foreign companies generally are investing in Marcellus shale because
they want a good return, rather than assets, said Kathryn Klaber,
president of Marcellus Shale Coalition.
"We should be celebrating the foreign investment that is helping to
finance domestic energy production and that is benefiting
Pennsylvanians in the prices they're paying for energy," Klaber said.
SUPPLY AND DEMAND
Pennsylvania sits above the sweet spot for one of the world's largest
natural gas deposits, trapped in a rock layer a mile below the surface
known as Marcellus shale. The Marcellus Shale Coalition, an industry
trade group, issued a report last week saying the United States could
take advantage of that gas by converting more vehicles to use it. Many
vehicles in South Korea, for example, are powered by natural gas
instead of gasoline.
The United States could become an exporter of liquified natural gas
because supply and demand determines gas sales here, whereas sales in
Asian markets and Europe are formulated on the price of oil. Sometimes,
Cicio said, that works in the United States' favor when oil is cheap,
but it can hurt when oil rises in price.
Foreign countries will do what it takes to get natural resources they
need, said Mel Packer, an organizer with Marcellus Protest, a citizens
group based in Washington, Pa., that opposes drilling because of
environmental concerns.
"They're going to buy them where they can get them," Packer said. "If
that means buying whole corporations to get the assets, that's what
they're going to do."
Two companies — Cheniere Energy Partners and Freeport LNG Development —
are seeking government permits to export liquified gas, according to
the Federal Energy Regulatory Commission.
A Chinese firm, ENN Energy Trading Co., signed a memorandum of
understanding to send 1.5 million tons of natural gas from Cheniere, a
Houston-based company operating the Sabine Pass port in Louisiana.
“We are excited to participate in supplying natural gas to China,”
Cheniere CEO Charif Souki said in a news release.
Two other port companies are expected to seek permission soon, said
Biliana Pehlivanova, a natural gas analyst with Barclay's Capital
investment bank in New
York.
One is Virginia-based Dominion Resources, which has Pittsburgh offices
and owns a liquified natural gas terminal and port in Cove Point, Md.
The facility could be converted into an export facility for Marcellus
shale gas by 2015, but spokesman Dan Donovan said the company has not
decided whether to do so and has not sought export permits.
"We are talking to our producers,” he said.
Dominion's Cove Point facility takes in imported liquified natural gas
from BP in Great Britain, Shell in the Netherlands and Statoil in
Norway. Statoil and Shell are investing heavily in the Marcellus
formation.
Last year, Warrendale-based East Resources sold its Marcellus interests
to Royal Dutch Shell for $4.7 billion. Last month, Statoil, which has a
$3.375 billion partnership agreement with the largest Marcellus
leaseholder, Oklahoma City-based Chesapeake Energy, said it might drill
as many as 17,000 Marcellus wells over two decades.
Other foreign companies with Marcellus shale interests are Mitsui and
Sumitomo from Japan, the BP group from Great Britain, Atinum from Korea
and Reliance Industries from India.
CIRCLING NEARBY
The Chinese National Offshore Oil Corporation tried to break into the
American energy market in 2005, when it bid $18.5 billion to take over
Unocal. It withdrew the offer after a political firestorm on Capitol
Hill.
In 2009, CNOOC succeeded in entering the American market, if not
exactly on land. It partnered with Statoil on four oil leases in the
Gulf of Mexico. This time, no one protested.
In November, Chesapeake announced it would sell a third of its holdings
in a Texas shale oil field called Eagle Ford to CNOOC for $2.2 billion.
Statoil and Korea National Oil Corporation recently invested in Eagle
Ford.
This year, CNOOC took a one-third share of Chesapeake’s leases in two
oil and gas fields in Colorado and Wyoming for $1.27 billion in direct
costs and drilling expenses.
The Chinese have more connections to Chesapeake, but the extent isn't
known. Chesapeake spokesman Jim Gipson said the company generally
limits disclosures to those required by regulators.
Last year, Chesapeake said it sold $600 million in convertible
preferred shares to “investors in Asia,” without specifying countries.
The company disclosed a separate sale of preferred stock to investors
including affiliates of the China Investment Corporation, the sovereign
fund of the People's Republic of China.
Even though China has interest in American gas, it has untapped shale
gas reserves that are 12 times higher than its traditional gas
reserves, the U.S. Energy Department said last week.
Pittsburgh geologist Greg Wrightstone said China falls behind when it
comes to technology to recover the gas and could learn by partnering
with an experienced firm such as Chesapeake.
President Obama and Chinese President Hu Jintao addressed that problem
in a formal statement announcing the “U.S.-China Shale Gas Resource
Initiative” in 2009.
“The United States is a leader in shale gas technology and developing
shale gas resources in a way that mitigates environmental risks," they
said.
"Bringing this expertise to China will provide economic opportunities
for both the U.S. and China.”