New Permian pipelines will add to oversupplied gas market
U.S. natural gas supply is outstripping demand, holding down prices and prompting speculation over just how low and how long the slide will continue; one research firm predicts prices next year will be the lowest in 22 years.
“It is simply too much too fast,” said Sam Andrus, IHS Markit executive director, who covers North American gas markets for the global energy analytics and research company. “Drillers are now able to increase supply faster than domestic or global markets can consume it.”
Taken by itself, the U.S. production gain the past two years alone would equal the fourth-largest gas producer in the world.
Though U.S. liquefied natural gas and pipeline gas exports have climbed to record highs and power plants nationwide are burning more of the fuel than ever before, even that strong growth in domestic and international demand cannot keep pace with record U.S. gas production.
There was a point in August when the U.S. Henry Hub benchmark price was flirting with $2 per million Btu before moving back into the $2.50 range on Sept. 20. But that seasonal price relief for producers in advance of winter looks to be temporary, according to a Sept. 12 report from IHS Markit.
Rising production and growing gas stockpiles will work together to knock down prices to an average $1.92 per million Btu in 2020, IHS Markit said. U.S. gas hasn’t averaged below $2 since 1998, according to federal data. Prices averaged almost $3.20 in 2018, dropping to an average of about $2.60 so far this year.
New pipelines delivering even more Permian shale gas to market will exacerbate an already oversupplied market, the IHS report said. Permian gas output is expected to average almost 15 billion cubic feet per day in September, double of just two years ago and triple from 2010 levels, according to the U.S. Energy Information Administration, or EIA.
Eventually, low prices will push companies to cut back on drilling, bringing supply and demand back into balance, IHS Markit said, forecasting a slight rebound to $2.25 for 2021.
“Rising prices stimulate supply and falling prices curtail it. What is unique here is the extent of reduction required,” said Shankari Srinivasan, IHS Markit vice president of energy.
The EIA predicts that U.S. dry gas production will average more than 93 bcf per day from September through the end of this year. That’s after August set a new record at more than 91 billion cubic feet, or bcf, per day. The numbers are about double what the nation produced in the mid-1980s.
Part of the problem, IHS Markit explained, is that additional oil pipeline capacity out of the Permian is allowing producers there to continue expanding their oil output, adding even more associated gas to an already oversupplied market. New gas pipelines out of the Permian could add an additional 6 bcf per day to the nation’s gas supply.
U.S. gas production has grown by 14 bcf per day, about 15 percent, since January 2018, outpacing the strong growth in domestic and export demand. The U.S. is now the world’s third-largest exporter of liquefied natural gas, with four LNG terminals in operation, three more under construction, and six more with regulatory permits in hand and waiting to sign up customers and line up financing before taking final investment decisions.
However, through LNG exports and domestic industrial demand, U.S. gas pricing is exposed to the world economy, and a recession would make it worse, S&P Global Platts said. If the global economy goes into a recession next year, demand from U.S. power and industrial sectors would likely decline a combined 2 bcf a day — 2 percent of total U.S. demand — further knocking down prices, Platts said.
“A global economic recession remains a distinct possibility next year.”
S&P Global Platts Analytics sees low prices hanging around for the next five years.
“This is in response to softening global market conditions, increased associated gas production and muted domestic demand-side gains,” the company’s Sept. 9 report read.
Without a recession and with some market rebalancing, prices could average $2.66 over the next five years, S&P Global Platts said.
It’s not just the U.S. — gas prices are down worldwide. Among the biggest drivers of low prices in Asia and Europe has been the increasing volume of U.S. gas flowing into global markets as LNG, The Wall Street Journal reported Aug. 27. Analysts expect demand from U.S. LNG export facilities to take about 12 percent of the nation’s total gas production by next summer as new facilities start up and existing plants boost their capacity.
“It was inevitable,” Ira Joseph, head of gas and power analytics at S&P Global Platts, was quoted in the Journal. “There is simply too much supply coming into the market,” and exports are a way to sell the gas.
The pain of low prices is hurting more than just U.S. producers. It has pushed the city of Medicine Hat, Alberta, to abandon 2,000 of its 2,600 municipally owned wells over the next three years. The town of 62,000, known as Gas City, has been losing about $2 per million Btu on the gas it produces, according to a report in the Calgary Herald.
Medicine Hat has owned the wells for about a century, and this month was producing about 6,500 barrels of oil equivalent per day from shallow natural gas and oil fields in southern Alberta and Saskatchewan.
The average cost of its gas production is about $2.78 per million Btu, and the spot price for gas at Alberta’s AECO hub closed Sept. 12 at 80 cents.
“You don’t need a sophisticated computer model to understand this gap means the city-owned utility has been hemorrhaging money,” said a Calgary Herald columnist.
Facing dismal economics — and an expected cash loss of $35 million this year from its gas and petroleum resources division, the columnist reported — the city will shut down most of its producing gas wells.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.