The United States has been exporting natural gas at record levels this year, with exporters making big profits on it and expected to continue making big profits because of Europe’s continued demand for the commodity. Yet prices at home have begun to climb higher, too, because natural gas production is growing at a much lower rate than exports. One team of analysts warned as early as the beginning of this year that eventually, U.S. gas prices and global gas prices will converge. For some, this would be good news.
Right now, the gas supply and demand situation looks more or less under control. Prices at home are down significantly, and exports are not rising as fast as they were in early 2022 because Europe’s storage facilities are full.
Meanwhile, over the first ten months of the year, U.S. LNG exporters shipped 11 percent more of the commodity abroad, with exports to Europe soaring by 150 percent, according to data from Kpler cited by Reuters.
It is Europe that is changing the price environment for natural gas on a global scale because Russian pipeline gas is not coming back anytime soon, while Europe has a long way to go to wean itself off natural gas as a whole. This means it will need even more U.S. LNG next year—this year, it had Russian gas until June. And this means that prices for gas at home will go higher because production will continue lagging behind demand.
According to Reuters’s Gavin Maguire, this could stimulate the transition to alternative energy sources based on their economics. On a levelized cost of electricity basis, he wrote, some forms of low-carbon energy, such as solar and onshore wind, are already much cheaper than natural gas power plants.
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Indeed, Norwegian energy consultancy Rystad Energy also estimated that solar in particular, is now 10 times cheaper to build in Europe than new natural gas generation capacity. Again, on a levelized cost of electricity basis.
The concept of LCOE is the basis normally used as a basis for the promotion of wind and solar as opposed to fossil fuel generation capacity. However, many critics oppose the use of this metric because it can be quite misleading.
First, the LCOE overlooks certain costs that are present in reality. Second, it assumes a certain level of electricity production that may or may not materialize because, ultimately, the output of wind and solar depends on the weather, and the weather is not exactly a reliable, immutable factor. Thirdly and perhaps most importantly, LCOE does not account for the backup baseload capacity necessary for every MW of wind or solar.
In other words, building more wind and solar capacity might actually end up necessitating the construction of more gas-powered plants to be used as a backup during the night for solar, or on windless days, for wind.
This is where federal subsidies for renewable energy come in. These could go a long way towards making wind and solar more economical than gas and coal generation. Yet the need for backup capacity will remain, meaning the demand for gas will remain. And this would make the situation with gas prices and electricity affordability even more complicated in the United States.
“Asian and European natural gas prices stand at $35 per mmbtu, versus $8.20 per mmbtu here in the United States. Given the underlying fundamentals that have now developed in US gas markets, we believe prices are about to surge and converge with international prices within the next six months,” investment firm Goehring & Rozencwajg said in May this year.
So far, prices haven’t surged that high for various reasons, notably the pipeline shortage in Texas that pushed gas prices to zero earlier this month. A glut of LNG tankers in Europe also affected short-term prices, as did warmer-than-usual October weather across Europe. Yet demand for gas remains robust and will only increase as winter begins—and it is about to begin, for real.
Interestingly, investment banks seem to expect prices to remain relatively low next year, with Goldman forecasting an average of $5 per million British thermal units and Bank of America seeing it at $4.50 per mmBtu. This year’s price jumped because of record exports. Next year, this record will be broken if Europe continues to rely on U.S. LNG, which it will, for lack of alternatives.
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Yet even if the banks turn out to be right and U.S. gas prices remain below this year’s average, which so far has been $6.60 per mmBtu, it would be a significant increase on gas prices from the past few years. On its own, this may not be enough to motivate a lot more wind or solar capacity. Federal subsidies, however, are another matter. They would certainly help the energy transition in the U.S., whatever the price of gas.
By Irina Slav for Oilprice.com
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