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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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A Reality Check For U.S. Natural Gas Ambitions

Something unusual happened while we were focused on the global oil-price collapse–the increase in U.S. shale gas production stalled (Figure 1).

Figure 1. U.S. shale gas production. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Total shale gas production for June was basically flat compared with May–down 900 mcf/d or -0.1% (Table 1).

Table 1. Shale gas production change table. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Marcellus and Utica production increased very slightly over May, 1.1 and 1.5 mmcf/d, respectively. The Woodford was up 400 mcf/d and “other” shale increased 300 mcf/d. Production in the few plays that increased totaled 3.3 mmcf/d or one fair gas well’s daily production. Related: The Broken Payment Model That Costs The Oil Industry Millions

The rest of the shale gas plays declined. The earliest big shale gas plays–the Barnett, Fayetteville and Haynesville–were down 25%, 14% and 48% from their respective peak production levels for a total decline of -4.8 bcf/d since January 2012.

The fact that Eagle Ford and Bakken gas production declined suggests tight oil production may finally be declining as well.

To make matters worse, total U.S. dry natural gas production declined -144 mmcf/d in June compared to May, and -1.2 bcf/d compared to April (Figure 2). Marketed gas declined -117 mmcf/d compared to May and -1 bcf/d compared to April.

Figure 2. U.S. natural gas production. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Although year-over-year gas production has increased, the rate of growth has decreased systematically from 13% in December 2014 to 5% in June 2015 (Figure 3).

Figure 3. U.S. dry gas year-over-year production change. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

This all comes at a time when the U.S. is using more natural gas for electric power generation. In April 2015, natural gas used to produce electricity (32% of total) exceeded coal (30% of total) for the first time (Figure 4).

Figure 4. Monthly shares of total power generation by fuel, 2001-2015. Source: EIA.

This is partly because of low natural gas prices but is mostly because of EPA clean air regulations that went into full effect in 2015 that are forcing retirements of older coal plants. Related: Is France Ready To Move Away From Nuclear Energy?

For now at least, the U.S. is producing less natural gas because shale gas is stalled and conventional gas production is in terminal decline at 10% per year. The country is consuming more gas for electric power generation thanks to government regulations, and we are poised to export more gas outside the country both as LNG and as pipeline gas to Mexico.

Combined LNG and pipeline exports plus coal-plant retirements are estimated to total 7 bcf/d of gas this year (10% of forecasted lower 48 states production), 12 bcf/d in 2016 (17%) and 18 bcf/d by 2020 (25%) (Figure 5).

Brilliant.

Figure 5. U.S. natural gas export and coal plant retirement forecast. 

Source: EIA, SENER (Mexico Secretary of Energy) and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Meanwhile, the global price of LNG is in the gutter. Landed prices in Asia are now less than $8 per mmBtu and, in Europe, are less than $7 per mmBtu (Figure 6).

Figure 6. World LNG estimated June 2015 landed prices. Source: FERC.

The appeal of U.S. LNG export was that prices in Asia were more than $15 per mmBtu and more than $11 in Europe before mid-2014. Because the LNG price is linked to crude oil price, all that changed when oil prices collapsed. Also, demand has fallen considerably and nuclear power options are being re-started for power generation in Japan.

The cheapest “tolled” export option (e.g., Cheniere’s Sabine Pass Project) breaks even at about $9.30/mmBtu based on $3.00 Henry Hub price plus 15% tolling (Figure 7).

Figure 7. Break-even North American LNG project costs. Source: Royal Bank of Canada and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Woops! LNG export from the U.S never made competitive economic sense to me but now, it looks dead-on-arrival.

The other big appeal of LNG exports, of course, was that we had 100 years of the stuff so it wouldn’t affect our supply or the price by very much. Now supply is stalled and demand is rising. If this continues, price increases won’t be far behind. Related: Warren Buffett And Elon Musk To Spark A Lithium Boom

Despite a potential reality check in December 2014 during The Fracking Fallacy Controversy, the EIA Annual Energy Outlook 2015 forecasts ever-increasing gas supply out to at least 2040 (Figure 8).

Figure 8. EIA total natural gas forecast. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

The stalling of gas production is a temporary anomaly but it is also a red flag. In July 2015, the future for cheap and abundant natural gas for decades looks increasingly uncertain.

By Art Berman for Oilprice.com

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  • Seppsbladder on July 31 2015 said:
    Not when new dry Utica wells are going to come in at 70 mcf/day.
  • JK on July 31 2015 said:
    Art-

    I'm a fan of your work. However, I'm not sure the LNG export numbers are accurate. To my knowledge, the US has never exported LNG unless you are referring to re-export. Furthermore, the first train of Cheniere comes on line this fall using about 180BCF/year with additional trains launching 6-9 months later. So 2016 looks high too. It won't change the dynamics much. I think the declines in production will start to accelerate in the next 6 months. NG producers are now going bankrupt from drilling years of unprofitable shale wells. More are on the way and others will no longer be able to borrow more than their cash flow as they max out their revolvers and therefore need to curtail drilling further.

    J
  • Rick on August 01 2015 said:
    Seppsbladder, that's one well. And that's an IP rate at that. When you can show 10 or more wells like that with comparable rates after six months, then your point is valid. Art is correct about short term and rise in price probably following.
  • Nony on August 01 2015 said:
    Mr. Berman has a long history of biased statements.

    1. In 2010, he said the Marcellus "would disappoint". Can anyone describe the growth of that play (the most impressive rampup of gas production ever done) to have been "disappointing"?

    2. He ignores the role of price. Utica and Marcellus are takeaway constrained and selling at a dollar less than already cheap HH pricing. (i.e. less than 1.50).

    3. He ignores the role of storage. (A large reason for the high production for the last several months was based on filling storage that was drained by a bad winter).

    -------

    Rest assured, demand volume is going up and nat gas is filling it at prices less than 3.00. Nat gas has CRUSHED Berman's comments since 2010 about how it needed $8 to produce shales.

    He is completely out of reality and is just preaching a viewpoint based on his beliefs in reducing population.
  • Lou on September 20 2015 said:
    I suppose the LNG export is more for Europe than Asia. It seems that a few countries such as Poland and Lithuania are building LNG import terminals. Anyone care to comment if there is a geopolitical component to it? Who is supplying Europe with natural gas currently?
  • Nony on November 21 2015 said:
    The long term expected prices are dropping. Look at the DEC 2019 contract*

    http://www.cmegroup.com/apps/cmegroup/widgets/productLibs/esignal-charts.html?code=NG&title=DEC_2019_Henry_Hub_Natural_Gas_&type=p&venue=1&monthYear=Z9&year=2019&exchangeCode=XNYM&chartMode=dynamic

    You can see that it was about $4.30 in 01JAN2015. It had already dropped to $3.7 as of end JUL2015 (when Art published this article). Since then, it has now dropped to $3.12. [This is less than $3, about $2.96, in constant real 2015 dollars.]


    *I pick a point 4 years from now, to get away from any momentary weather impact, to look at long term impact on prices, post Sabine LNG, etc. And DEC contracts tend to be highly traded, so it's a good data point.
  • Nabila on December 01 2015 said:
    @Lou
    Europe is at 35% supplied byt Russia, 18% Norway, 8% Algeria and the rest from LNG, mainely by Qatar.
    I have a question to Nony, how the gas price could stay too low since now almost 7 years, and the gas production going always up?? is it not subsidized???

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