Southwestern Energy on Industry Outlook, EPA Methane Regulations and US LNG Exports

One of the largest independent natural gas producers in the US, Southwestern Energy, is optimistic about the US natural gas industry outlook despite anticipated cost increases associated with upcoming EPA rulemaking.

Southwestern President and CEO Steve Mueller said his company was not concerned about fracking regulations, but described methane emissions as a "big concern" when fielding questions from Wall Street analysts at the Independent Petroleum Association of America's Oil & Gas Investment Symposium in New York on Monday.

The EPA is scheduled to release the results of a major study in 2014 on the potential impacts to water sources from hydraulic fracturing operations. The agency has also recently required operators of industrial processes that emit methane into the atmosphere to report this data. Methane is a more potent greenhouse gas than carbon dioxide and methane emissions from natural gas wells and associated infrastructure have become a major issue in the past few years.

Research done at Cornell University claims that when raw methane emissions associated with natural gas production and transport are coupled with carbon dioxide released when gas is burned in power plants, the fuel is a larger greenhouse gas contributor than coal. The industry has strongly disagreed with these findings, which it claims rely on insufficient EPA data.

Some studies have suggested as much as 6% of the natural gas produced in the US is released into the atmosphere as raw methane from wellheads and pipelines. "6% makes us one of the dirtiest industries on the planet," said Mueller.

The EPA will likely come out with a renewable energy standard or something like fuel efficiency standards applied in the auto industry, Mueller said, "either of which will raise costs."

But despite this regulatory uncertainty, he remains optimistic about the direction the industry and his company is heading. "We work best in a $3.50 [per million Btu] environment - we get stressed in a $2 to $2.25 price environment." US natural gas prices fell to 10-year lows in the $2/MMBtu range last year, but have rebounded to over $4/MMBtu in the past few weeks.

US natural gas supply has steadily increased over the past few years, but Mueller expects supply to flatten this year and possibly decrease by 2% to 3% in 2014, largely due to the falling rig count. "You have supply and demand balanced in 2014," he said.

While Mueller expects first LNG exports from the US in 2016, he believes maximum annual export volumes will be in the 5 billion to 6 billion cubic feet per day range, and that it will "take a while" to reach that level. He said the daily LNG trade is about 32 Bcf, so 5 or 6 Bcf/d would be significant, but it will be a slow process.