While oil prices have been going down, the US benchmark natural gas price is up sharply.
The futures contract based on the gas price at the Henry Hub in south Louisiana surged in November to near $5/MMBtu, and then back to around $4.25 as of 26 November.
It has since gone up, but that date was significant because in west Texas the market price for Permian gas at the Waha hub dropped to 25 cents/MMBtu or less for several hours, according to a report from RNB Energy. That was not the product of a trading glitch. The WAHA discount has been setting records, with the average cost per MMBtu one day recently at 46 cents, according to the US Energy Information Administration (EIA).
West Texas prices are depressed because pipeline capacity has fallen behind the growth of gas production. RNB said, “The Permian gas market is set to enter a period where takeaway capacity is completely exhausted.”
Prices at Henry Hub jumped due to an early cold snap at a time when gas in storage was as low as it has been in years, leading to speculation that a cold winter could deplete thin reserves.
The recent price moves are passing stories. While gas storage is low, the EIA’s Short Term Energy Outlook predicts that “strong growth in US natural gas production will put downward pressure on prices in 2019.”
Lower storage levels may not matter as much as they used to due to recent projects allowing Marcellus and Utica producers to deliver 3 Bcf/D more gas this winter, according to RBN. A year from now, Texas gas pipelines will come on line to send a wave of Permian gas to market.
There is so much gas, exports of liquefied natural gas (LNG) are surging. It is the same story in gas-rich countries around the world. Ample supplies are likely to limit the duration of any price spike. Some recent indications that gas supplies will keep growing:
US natural gas production will rise by 8.5 Bcf/D in 2018 to 83.2 Bcf/D, according to the projection by the EIA outlook. Both the total and the increase are records, and EIA expects the rise in 2019 will be nearly as large.
Saudi Aramco recently said it has 16 drilling rigs working in its unconventional gas program with a goal of pushing its daily gas production from 14 Bcf/D to 23 Bcf/D in a decade.
Qatar is expanding gas production 43% to keep it among the world’s LNG exporters. When it announced its exit from OPEC, Qatar said it wanted to focus on increasing LNG exports from 77 to 110 million tons/yr, according to news reports.
Gas production is rising in the US Gulf of Mexico, where it has been declining for decades. Eighteen deepwater projects will come on line this year and next, according to the EIA.
Hitting the Brakes
McKinsey and Co. predicts gas demand will grow 1% a year (compounded annual growth rate) through 2030, and steadily slow from there to 0.5% a year during the last decade of the period.
Even slow growth looks good compared with coal and oil, which peak during the period. McKinsey expects oil, coal, and gas to supply 60% of the world’s energy demand, with 55 million B/D of oil production in 2050.
Fossil fuels are competing with renewable sources, such as wind and solar, during a period when total energy demand growth could slow to a “pace not seen in the past 100 years,” consultancy Wood Mackenzie said.
Energy growth will slow as India and China shift toward less energy-intensive service-oriented economies. Other drags include energy saving technologies, such as higher efficiency electric heating in Europe and the US, to electric cooking in developing markets.
The pessimistic outlook is in line with recent power plant construction trends. Beginning in 2016, construction of new wind and solar power plants in the US exceeded construction of all other power sources, according to the EIA. In India, renewable power installations in 2017 exceeded coal capacity added for the first time, according to Bloomberg.
McKinsey said the growing scale of wind and solar will “accelerate cost reduction” for renewables. That assumes continued reductions in the cost of battery storage, which could fill in gaps when wind and solar are not available without gas.
For further reading
Global Energy Perspective: Accelerated Transition, McKinsey and Co.
Global Energy Perspective: Reference Case 2018, McKinsey and Co.
New Projects Expected To Reverse Gulf of Mexico Natural Gas Production Declines, EIA.
