US gas producer EQT is challenging the motives behind the government's decision to pause issuing new LNG export licenses, writes Antonio Peciccia
US policymakers should recognise the economic and environmental benefits of LNG and reverse their decision to pause authorisations for new export projects — Toby Rice, chief executive of the country's largest gas producer EQT, tells Argus.
Rice challenges both the economic and environmental concerns behind the Biden administration's decision to temporarily suspend new export authorisations for LNG projects. There is no evidence of a correlation between stronger LNG exports and higher prices, he says, pointing at the sharp decline in US gas prices over the past few months, which took place in spite of the continued growth in LNG export capacity. And in terms of environmental concerns, Rice stresses the US record in lowering greenhouse gas emissions, which have come down "by over a billion tonnes per year", he says, adding that 60pc of these reductions "came from doing this one thing — replacing coal with natural gas".
Rice acknowledges the government's decision is not going to affect the momentum of US LNG in the short term, but it would still affect a number of projects slated to come on line between 2026 and 2028, he says. He believes the country has enough shale resources to quadruple LNG exports, and "putting that amount of energy on the world stage would [result in] emissions reduction equivalent to electrifying every vehicle in America, putting solar panels on every house in the US and also doubling US wind capacity — combined", he says.
Strategy centred on LNG
EQT is no neutral observer of the recent move by the White House. Instead, it is materially affected by it. One of the LNG export projects still awaiting an export permit is the 9.3mn t/yr Commonwealth LNG terminal, with which EQT has signed a 15-year tolling agreement for 1mn t/yr of LNG.
These kind of agreements are central to EQT's strategy, Rice says. "We want to extend the connections that we have with our customers" and "be closer [to] the end results", so tolling agreements "allow us to take our natural gas through the facility, [...] pick up LNG and take that directly to the customer", he says. Rice adds that to the ability to control costs along the whole production chain, EQT is able to provide an extra layer of security by offering "supply with guardrails on pricing" — a pricing mechanism that includes a floor and ceiling price.
"We can put that amount of energy on the doorsteps of Europe for a cost of less than $12/mn Btu," assuming a US gas price of $4/mn Btu, Rice says. A gas price of $4/mn Btu would spur an increase in production capacity of as much as 40bn ft³/d and bring overall export capacity to 60bn ft³/d, he says.
But Rice does not see US gas prices reaching this level in the short- to medium-term. The marginal cost of supply in the US is going to be set by the Haynesville region — the shale formation straddling Texas, Louisiana and southern Arkansas — where EQT estimates that a $3.50/mn Btu gas price is needed to "actually justify operators going out there and putting rigs to work", he says.
By contrast, EQT operates only in the Appalachian region, where the Marcellus and Utica shale formations are located. After the spin-off of its midstream business in 2018 to form Equitrans, which still markets about 60pc of EQT's production, EQT has concluded three large acquisitions that include midstream assets, including the purchase of Chevron's Appalachian assets, the $2.8bn deal for Alta Resources and the $5.2bn acquisition of Tug Hill's upstream assets and XcL's midstream gathering and processing assets.
And while Rice sees associated gas from the Permian basin as the lowest-cost gas in the world, the company plans to remain focused on non-associated gas in the Appalachian region. "Associated gas production in the US is about 26bn ft³/d out of a total production of more than 100bn ft³/d", but the US gas price "is going to be set by the marginal cost of supply that's needed to meet demand", he says.
In the Appalachian region, EQT has managed to bring down its overall production costs — including drilling, overheads and transportation — to $2.50/mn Btu from $3/mn Btu, Rice says. "This is a corporate-wide level" that "covers all of our costs", he says, adding that he expects this cost structure to continue to "trend downwards towards closer to $2/mn Btu".
But infrastructure constraints — stemming largely from political opposition to key pipeline projects — prevent the US marginal cost of supply to be closer to production costs in the Appalachian region, Rice says. While US gas demand has increased by 50pc since 2010, pipeline transport capacity has grown by only a quarter and storage capacity by just 10pc, he says. For this reason, EQT has been able to boost output by maximising the use of pipelines that previously were underutilised, but existing infrastructure is now at its limit, with the Marcellus shale formation producing about 35bn ft³/d, he says. "Now the only thing that is going to allow us to increase supply and lower energy costs for Americans [...] is going to be getting more pipelines", Rice says.
The inability to debottleneck parts of the US gas network is behind what Rice calls "really bizarre" situations. Gas prices in the Boston area, which still relies on LNG imports in peak demand periods, at times can reach $30/mn Btu, despite the city being "literally 300 miles away" from the Appalachian region, where EQT sells gas at $3/mn Btu. He blames "pipeline cancellation, blockages and [political] opposition" over the past decade as the key factor behind this price disparity. "We've cancelled more than 7bn ft³/d" of planned transport capacity, and more projects have suffered major delays, he says, pointing to, among others, the 2bn ft³/d Mountain Valley Pipeline, a project started in 2016 that originally was meant to be completed in less than three years at a cost of $3bn but is still not in operation. The project is running "five, six years behind schedule and the cost [...] has ballooned to nearly $7bn. This is what the war on pipelines has produced", he says.
Net zero ambitions
Rice says his firm is focused on providing cheaper, more reliable and cleaner energyand has made substantial progress in reducing its carbon footprint.
Since 2018, EQThas cut its greenhouse gas emissions by 65-70pc and methane emissions by 70pc. And its overall carbon footprint now stands at 350,000 t/yr of CO2, including scopes 1 and 2, down from more than 1mn t/yr, Rice says. This was achieved through efficiency gains, the replacement of diesel-burning equipment with electric alternatives at oil fields and the replacement of about 9,000 pneumatic devices, which Rice says are "the biggest source of methane emissions for natural gas producers". The whole operation costs less than $30mn, or less than $10/t when taking into account an average lifespan of pneumatic devices of approximately 15 years, Rice says.
Going forward, the company plans to achieve net zero emissions by as early as 2025, which would make it the first company of scale to reach this target, Rice says. But he sees limited scope for further reducing CO2 emissions — which he expects to remain at 300,000-350,000 t/yr — and instead plans to offset its residual emissions by purchasing carbon credits, which is the "most cost-effective way to get to net zero", he says. To further reduce the firm's carbon footprint, "we can do everything that costs us less than $40/t", he says, a threshold broadly in line with some of the most expensive types of carbon credits. But Rice says EQT plans to spend $3mn-4mn/yr in carbon credits, suggesting it is targeting an average price of about $10/t.
