Just a few short years ago, the gas that escaped with the oil trapped in shale formations was considered basically a waste. Associated gas was flared—and it still is in some parts of the shale patch—but the idea of using it was expensive and difficult to realize. There were neither enough pipelines to carry the gas to the liquefaction plants already built along the Gulf Coast, nor was there great demand for it, with virtually every forecast seeing the global supply of natural gas at ample levels for the observable future. And then Russia invaded Ukraine, and everything changed.
Now, the price of gas in Europe is about $90 per million British thermal units, which would be equal to a price of $550 per barrel of oil, Bloomberg noted in a recent report. It’s hardly a surprise, then, that shale drillers are switching from oil to gas drilling, with gas drilling up by 50 percent since the start of the year.
Natural gas production in the U.S. has risen to an all-time high this year, with the average daily reaching 2.89 trillion cu ft, industry expert Robert Rapier pointed out in a recent story for Forbes. He then went on to add that this would not lead to lower gas bills for consumers.
The rush to drill for gas was certainly prompted by Europe’s gas shortage, for which U.S. liquefied natural gas turned out to be the easiest, if not cheapest, solution. Yet while LNG exports were growing, so was local gas consumption as coal power plants continued to be retired, replaced by natural gas-fired facilities.
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Indeed, the supply and demand balance is so fragile that, as Reuters’ columnist John Kemp reported earlier this month, U.S. gas drillers were already having to rush to catch up with demand, both local and international.
“The commodities folks have somewhat ignored the big growth that we’ve seen in the gas-rig count versus last year,” Leo Mariani, analyst with MKM Holdings, told Bloomberg. “It seems like oil’s gotten hit hard over concerns over the economy recently and gas has quietly just done really well on a relative basis this year.”
The other, potentially more important thing that has been happening relatively quietly is the fact that U.S. shale drillers are switching from oil to gas drilling. In other words, they are reducing their oil operations in favor of gas operations. In a tight supply environment in oil, too, this trend could eventually end up having significant implications for the security of supply and prices.
The outlook is not much brighter for gas, either. The recent collapse of Tellurian-led Driftwood LNG means it might not be all that easy for U.S. LNG companies to raise the funding they need to expand capacity fast enough. And this means the tight supply situation will extend.
Ironically, as the FT suggested in a report on Tellurian’s woes, doubts about the longevity of gas demand could be at the root of the funding problems that Tellurian ran into.
“What I see is an end to the euphoria and a grounding of the hype about US LNG and a re-evaluation of which of these projects is really going to be financially viable for the next 20 years,” Clark Williams-Derry, analyst at the Institute for Energy Economics and Finance, a think-tank, told the FT.
This is bad news for Europe, certainly, as it seems it plans to almost completely turn to LNG as a replacement for as much Russian pipeline supply as possible, to top it off with Norwegian imports.
Yet it might be good news for the U.S. The less gas is exported in liquefied form, the more there is for the domestic market and the more affordable it would be. Still, a return to the prices from a couple of years ago is, at this point, rather unlikely.
By Irina Slav for Oilprice.com
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