Much has been written about the recent sharp drop in oil prices due to demand destruction caused by the coronavirus outbreak in China. And while that story has been significant — benchmark Brent crude was down 20 percent at one point this month — oil prices have started to stabilize, bouncing back about 10 percent from its post-outbreak low to trade around $59 a barrel lately.
The same recovery story can not be told about global natural gas, which remains mired in a truly epic slump, with prices in the most critical markets trading at multi-year lows.
The U.S. benchmark Henry Hub gas price is now below $2 per million Btu in the dead of winter when demand for heating should support higher prices. That’s the lowest gas has traded on the Henry Hub since 2016.
In Europe, the benchmark contract for the Dutch TTF gas hub recently dropped below $3 per million Btu to its lowest level since September 2009. The situation in Asia is no better. Even before the coronavirus outbreak, spot prices for liquefied natural gas (LNG) in the region were dreadful and now have dropped under $3 per million Btu to their lowest level in a decade.
And there’s no natural gas OPEC to help curb the pain in that market. Instead, amid a general supply glut, most analysts expect the market to remain under pressure for at least another year or two — and possibly longer — due to planned additions of liquified natural gas (LNG) production capacity in coming years, mostly from the United States, but also from places like Qatar, East Africa and Russia.
Low gas prices are wreaking havoc on the earnings of international oil companies. In the United States, they could even impact the oil production outlook since shale crude output typically comes with substantial volumes of associated gas volumes. This gas is worthless, and in fact, producers in the prolific Permian Basin are flaring it at record rates — burning it off at the well-head rather than pay to capture it and ship it to market.
Prices at the Permian’s Waha gas hub are once again approaching zero, and with significant new gas pipeline capacity not expected until 2021, the condition won’t change anytime soon. Excessive flaring is now perhaps the most significant environmental black mark against the oil industry, and oil companies need to be careful to avoid ecological backlash. With climate change and environmental issues increasingly on the minds of the public and investors, energy companies put their social license to operate at risk by ignoring the problem.
In the United States, the gas supply-demand balance should tighten in the coming years, providing some support to the market and producers. Due mainly to depressed pricing, gas production is expected to fall this year for the first time since the shale boom took off in the early 2010s.
The U.S. Energy Information Administration is forecasting average output of 94.4 billion cubic feet a day by the end of 2020, compared to a peak of just over 95 billion cubic feet a day in the fourth quarter of 2019. That means that a growing lot of U.S. LNG producers should be competing for a more limited pool in domestic supply to meet global demand. A gas price that is fair to both upstream producers and LNG exporters would be ideal for the U.S. industry as it moves toward becoming the world’s biggest LNG exporter in the next five years.
It is, therefore, essential that the Trump administration continue to open new markets for LNG. The administration’s most recent push is the newly established International Development Finance Corp. (DFC), which will attempt to gain more access to Central and Eastern Europe, which relies on Russian supply, through a $1 billion loan program.
Trump’s attempts to resolve the trade war with China are also critical since China is the number one importer of LNG in the world, a title it’s expected to retain for the foreseeable future even with the recent demand dip from the coronavirus.
The phase one agreement between Washington and Beijing has already resulted in China pledging to buy more than $50 billion of U.S. energy products over the next two years. While China is unlikely to meet its full commitment, Beijing has also said it will allow importers to apply for exemptions from its 25 percent tariff on U.S. LNG starting March 2, in a goodwill move aimed at reaching a comprehensive trade deal with Washington.
While the global gas industry suffers today, low prices may ultimately make it stronger in the long run by stimulating higher long-term gas demand. Gas is now looking very attractive next to rival fuels in power generation, such as coal and renewables. That is boosting coal-to-gas switching economics, and when combined with gas’ lower carbon emissions profile, more significant displacement of coal’s market share is more viable in some markets. In Europe, China and India, gas-fired power generation is on the rise.
To that end, most gas producers will accept short-term low prices if it yields a secure, profitable future in the lower-carbon energy system emerging in the coming decades.
Without access to export markets, many wells would be shut-in or never drilled in the first place in the current low-price environment. That is why efforts to block or slow approval of LNG export licenses, like the recent behind-the-scenes effort to limit small volume exports by Sen. Joe Manchin of West Virginia, the ranking Democrat on the Senate Energy and Natural Resources Committee, are so damaging to the sector and to consumers.
Exports allow shale producers to keep pumping even when domestic prices are low. The alternative is lower production which eventually leads to a return of the traditional boom-and-bust cycle. When prices bottom out, producers cut back their activities, costing local communities jobs and tax revenues, until prices inevitably rise again. That’s not good for anyone, including consumers. It’s also not good for our collective efforts to cut carbon emissions since natural gas is the primary driver of U.S. reductions in the power sector.
Exports have allowed U.S. shale producers to continue to work and have kept consumer prices at record lows, while expanding America’s share of the global gas market. Exports are also crucial to meeting climate goals both domestically and internationally. That’s why the shale industry is hanging tough. Congress should help keep production flowing, not try to limit access to foreign markets.
Senate Energy and Natural Resources Chairman Lisa Murkowski, R-Alaska, is expected to rollout a new energy bill this week. Hopefully, it will include a commitment to LNG exports to continue America’s shale gas renaissance.
