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Europe Can Only Envy U.S. Gas Miracle From Sidelines

In the U.K. last week, politicians hailed the good news as utilities cut a meagre 5% from their customers’ sky high gas bills. Meanwhile, in the U.S., natural gas has become so abundant and the price so low that a company in Texas was burning the stuff off as a waste product.

In an age where ships carry liquefied natural gas from one side of the globe to the other, surely Europe should expect to see some benefit from this situation? Sadly, the answer is: Not any time soon.

The natural gas price in the U.S. has slumped this winter through a combination of mild weather and new technology that has enabled production of huge amounts of gas previously trapped in impermeable shale rock.

There has been such a surge in production that existing pipelines cannot cope.Goodrich Petroleum has been burning off gas it produces from an oil field in Southern Texas because the nearby pipeline is full and the price of the gas wasted isn’t high enough to justify shutting down oil production.

The U.S. benchmark gas price closed at a 28-month low Thursday, at $2.697 per million British thermal units. The gas price in the U.K., which is the most liquid European gas market, is currently almost $6 more per million Btus than in the U.S.–the highest premium in at least a decade (see chart).

BP, ICE futures, Nymex futures

This means that the contents of a typical LNG tanker would sell for around $90 million more on one side of the Atlantic than the other.

So why is nobody in the U.S. putting their gas into tankers and exporting it to the U.K.?

It’s because, “operators [LNG] conceived of or constructed terminals at a time when it seemed that the U.S. would need increasing imports,” said JPMorgan analysts in a research note. “The shale revolution literally changed the gas market overnight,” but not the gas infrastructure, which still cannot export.

The U.S. and its bargain prices are essentially cut off from the rest of the world.

A number of companies are looking at converting their idle LNG import terminals for export, but that will take until 2015 at the earliest.

If Europe must wait before it can share in the U.S. gas bonanza, could it create a boom of its very own? That also seems unlikely.

To be sure, there are promising shale resources in Europe. In the U.K., Cuadrilla Resources believes it may be sitting on 200 trillion cubic feet of shale gas, enough to meet domestic demand for 64 years.

However, within hours of the discovery, environmental groups began campaigning to halt shale gas drilling in the U.K., arguing that it is dangerous and polluting. Recent confirmation that, as it tapped the shale rock in the north of England, Cuadrilla triggered a number of small earth tremors has also spooked locals.

The company met with fervent opposition at a recent town hall meeting near another of its licences in southern England where it also hopes to explore for gas.

France has already banned shale gas drilling and its oil company Total is spending its money in the U.S.  Poland seems to be the only country in Europe embracing it, although early drilling results there have been mixed.

Opposition to shale drilling is also growing in the U.S., but in some parts of Europe it threatens to strangle the industry at birth.

These “considerable hurdles” mean the status quo is likely to prevail in Europe for some time, said analysts at Bernstein Research in a note.