As little as two years ago, suggesting North America would be in the position to export LNG would have seemed delusional. Conventional wisdom, based on conventional gas theory in place for forty years also saw gas on the global scale as depleting or insecure and thus open to price volatility.

The proposed solution, famously endorsed before Congress by Fed Chairman Alan Greenspan at the height of his reputation, was to restart mothballed LNG import terminals even as a dozen or so new terminals sprang up on both coasts of North America.

In the meanwhile, in what must be one of the worst examples of bad timing in any industry, the unconventional wisdom came up with massive new shale reserves, not merely providing the solution but turning it on its head. Supply was now so massive that demand fears were irrelevant. Shale gas emerged so rapidly and so successfully that North America had the exact opposite problem: they needed a bigger market.

Mother of all shales

Today it is clear North America has resources that can be called game-changing, paradigm-shifting or simply “mind-boggling” as Range Resources CEO John Pinkerton recently described Pennsylvania’s Marcellus Shale.

Conventional gas flows of North America depended on big pipelines hauling big volumes from production areas in the Gulf of Mexico, Mid-Continent and Alberta to consumers in the North East, upper Midwest and Eastern Canada.

Whereas the Marcellus is still in its infancy, surging production from the Barnett Shale in Texas and the Haynesville Shale in Louisiana is already creating problems by competing with Canadian gas even several years before the Marcellus production would be significant. The North American shale experience started in the Barnett Shale in Texas in 2002, but it is the Marcellus which has evolved into the mother of all shales. The Marcellus had reserve estimates in January 2007 of 5 Tcf but 50 Tcf by December the same year. Today it is ten times that: the second largest gas field on earth has come out of nowhere. The size would be significant enough anywhere, but the bounty lay within commuting distance of one of the great gas markets of the planet in the North Eastern United States. The Marcellus is to natural gas what Spindletop was to oil a century ago - and more. The Marcellus experience is almost certainly repeatable in multiple locations on every continent.

Yet LNG marketeers have been slow to understand the looming impact of North American shale on world LNG markets. Just as the modern shale combination of hydraulic fracturing and horizontal drilling was opening up undreamt of deposits, U.S. LNG import capacity was built or upgraded.

The first hint that the paradigm was not shifting so much as shattering was in 2009 when the planned Kitimat terminal in British Columbia was reborn as an export terminal. The gas would come from western Canada’s Horn River and Montney shales. Pre-2009, the theory was that gas imported to Kitimat would compete for Asian markets with gas from Australia and Peru. Post 2014, when the terminal will be completed, BC gas will compete in Asian markets against Australian, Peruvian and many more LNG exporters who had seen one leg of the three-legged world gas stool of North America, Europe and Asian markets sawn off.

This year we are seeing talk of LNG exports from another terminal near Kitimat and possibly even from Oregon. But the big game changer occurred in May 2010 when Cheniere Energy, operator of the Sabine Pass LNG terminal on the Gulf of Mexico announced plans to export US gas from 2014 - a plan quickly added to by other operators in Cameron LA and Galveston.

World LNG markets still appear to be in denial about the possibility of shale removing still more markets out of the demand equation even as yesterday’s customers become tomorrow’s competition. The shale story outside of the U.S. is still in its infancy, but it is finally dawning on the conventional wisdom that in the future, they will be unconventional and shale gas will be the usual. The U.S. experience shows how quickly it can emerge. The Barnett shale produced zero gas in 2002 but enough in Q3 2010 to supply the entire annual gas use of Sweden and Switzerland combined from Fort Worth’s Tarrant County alone.

Cheniere Energy told the Heren LNG Trading conference in London last month that they expected U.S. Henry Hub prices could reach $2.50 MMBTU. Cheniere liquefaction costs add $2.75 and transport to Asia another $2.50. European delivery would be in the area of $2, meaning that Henry Hub gas would be competitive even up to $6 with Asian and European prices of $10 to $12 today.

Many LNG marketeers are still in denial about the long term capacity of U.S. shale. In this, they echo the disparate groups who depend on a view of insecure or expensive gas to make the economics work. Groups such as nuclear, Coal CCS, renewables and Russia normally have nothing nice to say about one another, now find themselves united in the face of the sudden emergence and looming permanence of shale. One commonly shared objection is that by 2014, U.S. gas will prove environmentally unacceptable or start depleting instead of growing, thus leading to U.S. gas becoming too expensive to compete in world markets.

Gas is all about oil

As much as this depends on a probably unrealistic view of shale gas potential, it is blissfully unaware of the true economic background of gas prices. Simply put, today’s gas is all about oil. The two key shale techniques of fracturing combined with horizontal drilling are now releasing undreamt of oil riches. The Eagle Ford shale in Texas holds special promise, with some analysts stating it is the largest U.S. oil discovery since the Alaskan North Slope – and far closer to markets. But the story here is that wet shales, i.e. ones that contain gas, oil and liquids are all part of the package from the same hole. In this scenario, oil is the $100+ prize and it is now four times more valuable than gas measured on BTU equivalency.

With limited growth potential and surging supply in U.S. markets there are only two possibilities for gas - flaring or giving it away. Flaring is not an option, but to access high priced oil, literally giving gas away, or even more incredibly paying someone to take it off their hands makes economic sense in the Texas markets. Gas, the wonder fuel of the 21st century to most customers may well grow up to become the problem child of the hydro-carbon industry.

The shale oil story lies behind the disconnect between WTI and Brent Crude markers, even as much of the Gulf of Mexico production shut down in 2010.The massive volumes coming out of North Dakota’s Bakken oil play were, like shale gas, originally assumed by the European gas industry to be merely an interesting anomaly. The question now is not if, but when, the experience of wet shale plays will break out world-wide.

Nick Grealy has run www.nohotair.co.uk since 2008, highlighting the global impact of shale gas. He is also launching shalegasinfo.eu to promote public acceptance of shale in a multi-language format to the European audience.