Forbes | Jude Clemente
Led by the surge in Appalachia’s Marcellus and Utica plays, U.S. natural gas production has increased over 50% since 2005 and related infrastructure to move the gas has become short. This is really not just an issue for the U.S. but for the world: the Northeast shale gas boom is making U.S. natural gas a global commodity. Combined, Pennsylvania, Ohio, and West Virginia have rapidly evolved from producing 2.5% of U.S. gas in 2005 to nearly 30% today.
As Northeast supplies are wanted by many markets, the entire U.S. gas industry is being flipped from its decades-old way of operating, which was basically west-to-east and south-to-north. The industry has thus needed to re-learn receipt points and flows as the whole way of operations is transforming, a change that is being further affected by regulatory and social changes, such as the climate change-driven anti-fossil fuel movement. Not exactly a small problem.
The Northeast is still a highly constrained gas market and much of the region doesn’t have access to the local gas surge because there aren’t enough pipelines to take the gas away to markets. In fact, combined with low prices, this lack of infrastructure often has companies in the region curtailing gas production because there’s no way to move the gas out. Cabot Oil & Gas, which has been ranked as the 2nd biggest PA Marcellus producer (here), had to curtail 75 Bcf in 2015, or enough gas to heat more than 1.1 million homes for a year.
New England in particular has suffered and is easily the highest priced gas and power market in the country, with respective rates of 45% and 55% higher than the national average. Natural gas is promoted as a way to reduce New England’s over reliance on heating oil and oil-based power generation, the latter averaging a whopping 16.2 GWh/day in Winter 2014 (here). When gas demand rises in New England, a lack of pipelines means pricer LNG imports from as far away as Yemen. Remember that residential heating gets priority over gas needed for utilities.
The “Not in My Backyard” obstacle is very strong in the Northeast. One problem has been that the Northeast is a relatively new area of major gas production, so residents aren’t used to the infrastructure required to produce more, unlike, say, Texans or Oklahomans. Moreover, the Northeast is generally more environmentally conscious (here) and has a higher population density, which makes it tougher to lay pipelines.
For years, the unconventional drilling that enabled the surge in production in the region has been criticized by environmentalists worried about water supply and air quality. But, the pipeline issue has brought together a broader group of opponents, from advocates wanting to preserve habitat to landowners upset about companies using “eminent domain” for compulsory purchase to climate campaigners convinced fossil fuels must remain in the ground.
This isn’t welcome news for an oil and gas industry already caught in a historically low price environment that is reducing revenues and making projects more difficult. We have seen gas infrastructure and pipeline projects delayed, denied, or cancelled that are worth billions of dollars, perhaps the largest being the $1 billion Constitution Pipelined headed up by Williams and Cabot. Anti-pipeline groups stress that combating climate change should simply focus on ramping up renewables, storage, energy efficiency, and other demand-side management programs.
Regulatory wise, FERC is the main permitting agency for interstate pipeline projects and is an independent actor that regulates the transmission of gas, electricity, and oil. Particularly in environmental matters, projects require certain state (and sometimes local) permits.
Appalachian Gas Production Has Surged
Sources: EIA; JTC
A FERC review of an interstate pipeline project lasts an average of 15 months, with no data available on the average time for approval from an individual State agency. The approval by the regulating authority is usually conditional, and the project sponsor must then either accept or reject the conditions or reapply with an alternative plan.
Looking forward, one key area to watch is how new takeaway capacity in the Northeast impacts local prices, likely to increase as Marcellus/Utica output is able to reach more markets for industry use, power generation, and export. Just take New England’s possible incremental gas needs, where gas power increased 15% YoY in 2015. Since 2000, gas has about quadrupled its market share to over 50% of electricity and will account for 65% of planned new generation in the region.
Other things to consider are that major pipeline companies are looking to the Southern states such as Florida, which after Texas produces the most gas power at 160 TWh but has just two major gas pipelines serving over 20 million people, and fast growing Mexico, where public opposition and environmental regulations are less. Natural gas constitutes 60% of Mexico’s power generation, nearly double the U.S. rate. But, those pipeline projects on the drawing board in the Northeast could lift capacity well above anticipated production levels, although the planned additions for 2017-2018 could also be less than advertised.
Rising Gas Pipeline Capacity in the U.S. Northeast
Sources: Platts; JTC
So, there is a number of price considerations going on here.
We know that not enough pipelines can keep prices low in the producing states but higher in the importing states while also causing price spikes. But, more pipelines can also increase prices in the producing states and also even in the importing regions by granting more access and expanding the gas customer base, which thanks to LNG now exist at the global level.
And as for the much talked about U.S. LNG export business, bear in mind the case of Australia, where gas prices have risen and been linked to precarious outside markets as more export projects came online. This is a critically important but often ignored subject for us because Australia didn’t, or won’t in the future, have nearly the domestic incremental gas needs like we are setting ourselves up to have with “The Dash to Gas.”
Per ExxonMobil, the global LNG export market is expected to increase by nearly 3 Bcf/day per year, with WoodMac expecting the LNG importing nations to double to nearly 70 by 2030. That’s a huge amount of competition U.S. natural gas consumers could have, especially as LNG transforms natural gas into a global commodity sold like oil, where “events over there affect prices here.”
If the LNG market expands as expected (it might not), the U.S. could be exporting 15-20 Bcf/day by 2030. Combined with 10-15 Bcf/day going to Mexico and eastern Canada, this would mean that 40% or more of current U.S. gas production could be leaving the country. I know that studies have shown U.S. gas prices won’t increase much with more gas export, but let’s check what The Australian Institute and an economic study commissioned by Australia’s Department of Industry, Innovation and Science Energy Division have concluded, covering both the eastern and western sides of Australia.
Again, this is not a study, but what has actually happened to domestic gas prices with more LNG exports in Australia:
- “The recent increase in gas contract prices is directly linked to the choice that gas suppliers have to export to the Asian market… The western gas market is linked to the world gas price through large LNG gas facilities…and to help mitigate higher domestic gas prices, the West Australian government introduced a policy that set aside a portion of gas for domestic use” The Australian Institute, 2013, here.
- “All eastern Australia states have experienced a period of substantial rises in wholesale gas prices during the last three to five years. The development of three LNG projects in Gladstone has been a major factor contributing to these increases,” Oakley Greenwood, 2016 here.
Regardless of how this all plays out, higher prices for natural gas are surely coming. The price of natural gas is up some 75% in the last six months, with the possibility of $4 gas by winter. Further, the industry is suing and estimates that Pennsylvania’s new regulatory package could increase operational costs in the Marcellus by 30%, or $2 million per well (here). Pennsylvania is probably the most important incremental gas-producing state.
Higher gas prices will clearly help renewable energy systems most, namely by making wind and solar more competitive, along with incentivizing crucial GHG reduction levers such as micro-grids, distributed generation, battery storage, etc.