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Is Natural Gas In The Midst Of A Boom-Bust Cycle?

Natural Gas

After six decades of relying on outside sources, the United States is poised to become a consistent net exporter of natural gas. The shale boom and the rush to embrace LNG has fueled the shift, one that will have significant consequences for natural gas prices around the world.

In 2016, total U.S. natural gas imports reached 3 trillion cubic feet, the bulk of which came via pipeline from Canada. Month to month, natural gas imports hovered around 250 billion cf, according to data from the EIA. Exports, however, have been shooting up from less than 60 million cf in 2006 to 269 million in January 2017. The ratio of imports to exports has been falling for years, and 2017 will be the year that exports officially exceed imports for the first time since 1957.

That date is significant, as it was the year the United States imposed mandatory import quotas and effectively isolated itself from the international energy market. When quotas were dropped in 1971, the United States became dependent on energy imports. But that age seems to be ending, consigned to the dustbowl of history thanks to the shale revolution and the push to embrace LNG exports, as well as the lifting of a ban on energy exports by Congress in late 2015.

Global demand for liquefied natural gas has been a major factor in driving the trend, with LNG now accounting for 20 percent of all natural gas exports. The EIA expects this trend to continue, and in the Annual Energy Outlook for 2017 forecasts LNG driving overall American natural gas exports, with export capacity reaching 9.5 billion cf/d by 2021, once four new export terminals join Sabine Pass. While LNG and natural gas exports via pipeline are expected to increase, imports from Canada will slowly decline.

As natural gas seizes a larger portion of overall U.S. electricity demand, domestic consumption will increase as production begins to taper off, declining from the current annual increase of 4 percent to something closer to 1 percent by 2020. Exports are expected to drop as well, particularly if oil prices remain low.

The EIA projections for LNG find its competitiveness stays strong in a world with higher crude prices, as consumers move towards cheaper alternatives. LNG trade worldwide has grown substantially, reaching 256 million tons in 2016 according to Shell, and capacity has increased along with it, fueling speculation that the LNG market may be glutted. Related: Oil Workers Become A Priority Target In South Sudan Conflict

At the moment LNG prices are linked to crude oil and the major markets in East Asia lack an effective hub price, one that can function as the Henry Hub does in setting prices. That could change in 2017, however, as Japan forges ahead on liberalizing domestic natural gas prices and encourages investment in a new LNG hub.

Interest in spot price-based LNG shipments has increased. Out of the fifty-six cargoes dispatched from Sabine Pass in 2016, twenty-three carried gas sold on spot prices, according to the EIA. Surging demand for LNG could drive up U.S. natural gas prices, which in 2016 fell to their lowest level since 1999. And high prices will be needed if existing supply begins to falter by the mid-2020s, as ConocoPhillips expects. An expansion of supply will need new investment, and uncertainty over supply will push buyers back to long-term contracts.

Others are more sanguine, with ExxonMobil estimating global LNG trade will grow 2.5 times by 2040. Shell’s short-term outlook sees LNG supply growing by 50 percent by 2020, with demand steadily increasing at a rate of 4-5 percent each year. These estimates are tied to developments in electricity generation, as governments move away from dirtier fuel sources like coal and embrace natural gas.

Expectations for growing demand in LNG worldwide would seem to back-up the EIA’s belief that the U.S. will, in the short-term, grow into a net exporter of energy. Whether or not that remains the case after 2020 depends on the movement of the oil price, which remains hobbled by the 2014 crash. Should prices pick back up, or supply become constrained, consumers could be pushed towards LNG and exported natural gas as a cheaper alternative. This would be a win-win for the United States.

But it should be noted who would do the consuming. At the moment, Mexico’s demand for cheap U.S. natural gas is strong, and will likely become stronger. Should an economic feud between the U.S. and Mexico break out, or negotiations to alter trade agreements grow too acrimonious, the country could look elsewhere for its energy supplies. This seems unlikely, given the competitive edge enjoyed by U.S. producers, but it remains a possibility.

Then there’s East Asia, the center of global LNG demand and driver of future demand according to most analyses. Right now, the U.S. has to compete with major producers like Australia and Qatar. This week, Russian President Vladimir Putin announced his intention to turn Russia into the world’s number-one LNG producer. That country is currently developing export capacity in the Arctic. Related: Is An Iraqi Production Slowdown Inevitable?

Despite the rosy predictions of Shell, ExxonMobil, the EIA, and others, commentary for months has focused on a global LNG glut. Prices will stay low and producers ranging from Qatar, Australia, Russia, Iran, and the U.S. will scamper after market share and chase consumers by offering the most competitive deals, driving prices down even further. Statoil, in its annual outlook, warned that LNG was in the midst of a classic boom-bust cycle, with the final result being the transition of LNG into a more typical global fuel source, reported Platts.

It was also noted that many predictions regarding future natural gas demand are coming from those with a stake in the game: thanks to its acquisition of BG in February 2016, Shell now commands 22 percent of the global LNG market, and has made its intentions to become a natural gas company clear. A balanced market helps its bottom line, while estimates of a glutted market from marginal players and analysts looking to see prices go up run in the other direction.

For now, the United States can bask in its new status as an energy exporter, but whether that status sticks depends on global factors.

By Gregory Brew for Oilprice.com

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  • Bart Johnson on April 05 2017 said:
    The "dustbowl" of history? I think the actual phrase you're looking for is "dustbin" of history, dustbin being a British term for "garbage can. For example, http://www.economist.com/node/1824115

    Also, with the inclusion of horrendous grammar such as "...many predictions regarding future natural gas demand is coming...", it is clear that you could use a proof reader.

    2/10. Sloppy. Show us you can do better.

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