EC Who Will Feed The LNG Monster?

In the previous article, I discussed the global nature of the oil markets. But the shale oil boom in the U.S. temporarily increased the localized impact on the West Texas Intermediate (WTI) benchmark. As a result, its price diverged from that of international crudes for a few years.

The natural gas markets, on the other hand, are far more localized due to the difficulty in transporting natural gas. That means that natural gas in the U.S. could be $3 per million British thermal units (MMBtu), but double or triple that level in Japan or Europe.

Natural gas production in the U.S. has exploded since the beginning of the shale gas boom. From 2005 to 2015, U.S. dry natural gas production increased by 50%. Natural gas prices fell in response. From 2005 to 2008, annualized natural gas prices hovered in a range from just under $7/MMBtu to nearly $9/MMBtu.

In 2009, the average annual price of natural gas fell below $5/MMBtu, and it has never been above that level on an annualized basis since then. On the other hand, the annualized price has been below $3/MMBtu in four of the past ten years.

But natural gas demand has been strong. Natural gas exports to Mexico have now exceeded 5 billion cubic feet per day (Bcf/d), equal to about 7% of U.S. daily production. Consumption by the electric power sector increased by nearly 50% from 2005 to 2016, reaching 27 Bcf/d. Industrial demand has also increased by 30% as some manufacturing relocated to the U.S. to take advantage of low gas prices.

Demand has also increased from liquefied natural gas (LNG) exports. The Energy Information Administration recently announced that LNG exports reached 3.9 Bcf/d in December. But that’s a drop in the bucket compared to what is forecast.

In its Annual Energy Outlook (AEO) 2019 with projections to 2050, the EIA  projects a surge in LNG exports:

LNG exports will drive the natural gas trade.

This expected surge begs the question of whether U.S. natural gas supplies can continue to keep pace. I read an article earlier this week that correctly noted that to date, most of the U.S. natural gas production growth has been in the Appalachia Region. Appalachia production has exploded since 2009 from below 2 Bcf/d to more than 30 Bcf/d in 2018.

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Comments

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James Hanshaw 3 months ago Contributor's comment

Good article, I had some thoughts on nat gas published in this article a while ago

seekingalpha.com/article/4158962-gas-new-oil

Moon Kil Woong 3 months ago Contributor's comment

Getting rid of coal is a good thing. As for natural gas, production and demand are both growing phenomenally. Although it looks like gas is going to outstrip demand, it is only for the short term. That is why, unless a company is hurting for cash, it is frankly stupid to be increasing production now. It is much more valuable later.