Natural gas prices have sunk this year, falling due to record production and swelling stockpiles.
Low prices are putting a strain on shale gas drillers, with Appalachia in particular feeling the effects
Low prices are putting a strain on shale gas drillers, with Appalachia in particular feeling the effects. Globally, the market for gas is also suffering from a bout of oversupply that could take several years to clear up. At the same time, some industry executives are starting to exhibit concern regarding the growing public pressure to place restrictions on gas due to its impact on climate change.
Surplus puts financial strain on gas drillers
Last year, the U.S. market for natural gas tightened up, squeezed by swings in temperatures, rising exports and structural increases in demand due to more gas-fired power plants. Henry Hub prices topped $4/MMMBtu in November 2018, just ahead of the peak winter demand season as the market grew concerned about supply.
But the price spike was temporary, and the gas industry continued to break production records. Both the Marcellus and Utica shales in Appalachia, and the Permian basin in West Texas, exhibited blistering growth. As winter came to an end, depleted inventories were quickly restored.
In fact, Henry Hub prices entered a steep slide this past summer, as gas output continued to rise. Producers in the Permian and the Bakken are flaring at record rates, and regulators have done little to rein them in. Nevertheless, more gas is finding its way to market, sinking prices and putting producers in a bind.
Henry Hub prices entered a steep slide this past summer, as gas output continued to rise
But not all gas companies feel the effects in the same way. Drillers in Texas, New Mexico and North Dakota are mainly focused on producing oil, and the gas comes out of the ground as a byproduct. Low prices do not necessarily alter their drilling calculations.
Meanwhile, in Appalachia, where E&Ps are mainly focused just on producing gas, low prices are causing deeper problems. Pittsburgh-based EQT, the largest natural gas producer in the country, has seen its share price fall by more than half this year amid falling gas prices and disappointing financials. Others have fared even worse. In September, EQT announced that it would lay off 23 percent of its workforce as part of a corporate restructuring.
Appalachian gas production is still growing, but the monthly gains have slowed dramatically as the pace of drilling slows. The EIA forecasts production growth of 132 million cubic feet per day (mcf/d) in November, an increase that is less than half of that seen in recent months. As drilling slows and depletion takes hold, it is conceivable that production grinds to a halt entirely.
That is not necessarily the case in the Permian where oil drilling remains the focus. New pipelines could also divert some of the gas currently being flared into pipelines, where it will be shipped to markets along the Gulf Coast. However, the slowdown that is simultaneously underway for oil drilling due to mounting financial and operational problems in the shale industry could yet cut into gas production growth as rigs are pulled from the field.
Investors are increasingly skeptical of the entire industry. “It’s under siege almost,” John Augustine, chief investment officer for the wealth-management arm of Huntington Bancshares Inc., told the Wall Street Journal. “It’s tough to go in with conviction.”
The global outlook is also problematic. A flood of new LNG export terminals came online this year, the culmination of a wave of investment made earlier this decade when prices were much higher. The increase in export capacity, coming all at once, dragged prices down. Worse, the surge in supply came at a time when demand was slowing down. LNG prices in Asia have fallen by half since last year.
The surge in supply came at a time when demand was slowing down
“We believe the slower rate of demand growth, rising domestic production, and new pipelines will limit China LNG import growth. Meanwhile, many other major Asian importers have realized weak LNG demand this year,” Bank of America Merrill Lynch said in a note entitled “The Big LNG Short,” published last month.
“China and other Asian countries helped global gas demand keep pace with supply growth during 2015-18. But the 40 mtpa LNG supply growth over the past year, led by 15 mtpa growth in the US, proved too much for Asia demand to digest and triggered LNG cargos to Europe,” Bank of America said. The influx of LNG into Europe is decimating coal demand, but the power-switch by utilities in Europe has still not been enough to tighten up the global market for LNG.
“We believe the US led LNG supply growth will overwhelm global demand at current prices during the next two years,” Bank of America added. The investment bank warned that global gas prices for next year are currently trading $1/MMBtu higher than they should be. “A mild winter across the northern hemisphere or a worsening macro backdrop could be catastrophic for gas across all regions,” Bank of America said.
Political pressure grows
Even as the industry grapples with oversupply in the near- and medium-term, it has high hopes for gas as a long-term source of growth. But that vision has also run into trouble recently.
Growing public pressure to address climate change has already helped push coal into terminal decline. Oil and gas executives are now worried that natural gas is becoming a target. Industry trade groups have begun running ads touting the benefits of gas, hoping to head off a public backlash.
But the concern is increasingly evident. “If large institutional financial banks stop funding fossil fuel companies, that’s going to be a real challenge,” Charlie Riedl, executive director of industry trade group Center for Liquefied Natural Gas, said at an industry conference, according to S&P Global Platts. “That’s a conversation we have to have. If natural gas becomes the next coal, that’s going to be a real challenge.”