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Despite Growth, Several Factors Could Dent U.S. Natural Gas Exports, Says API

Although the U.S. natural gas market has achieved record growth, a series of factors, including challenges to liquefied natural gas (LNG) exports and escalating trade disputes, could hamper global demand, according to the American Petroleum Institute (API).

In a blog post, API chief economist Dean Foreman said "American technology and process innovations" helped lower prices while domestic gas production in August increased 12% year/year, or more than 9 Bcf/d, citing data from the Energy Information Administration's (EIA) most recent Short-Term Energy Outlook (STEO).

"Natural gas breakeven costs below $2/MMBtu were impossible just a few years ago, unless a well also produced significant amounts of oil or natural gas liquids that raised its output value," Foreman wrote last week. But he cited figures from BTU Analytics that showed the breakeven costs to drill a natural gas well in the Appalachian Basin and the Haynesville Shale fell below $2/MMBtu in July.

Foreman also cited EIA estimates that gas prices were expected to average $3.03/MMBtu in 3Q2018, down from $3.06/MMBtu in the year-ago quarter. That in turn helped stimulate natural gas demand for electricity generation and LNG exports, which EIA estimated had increased by about 1.8 Bcf/d in 3Q2018 compared with 3Q2017.

"The expansion of natural gas and oil production has benefited the U.S. economy by providing abundant and affordable primary energy sources and an engine of economic activity to major producing states like Texas, Oklahoma, New Mexico, Colorado, North Dakota, Pennsylvania, Ohio, Louisiana, and others," Foreman said. "As with petroleum exports, however, sustaining and growing these benefits largely depends on market growth -- to add production that production must have new and/or growing markets to supply, and policy can affect the potential for that market growth."

The trade policies of the Trump administration are beginning to show cause for alarm, API said. Last week, China said it would levy $60 billion in tariffs on American goods, including LNG, in retaliation for the White House moving forward with tariffs on $200 billion of Chinese products. Another worrying development is the Department of Energy's (DOE) proposal to extend subsidies to coal and nuclear power producers.

Foreman warned the escalating Sino-U.S. trade dispute "could undermine hundreds of billions of dollars in potential investments for LNG export projects and their supporting infrastructure," while the DOE's plans "would squeeze the potential domestic market for natural gas, which could further stymie U.S. production growth and many of the economic benefits it delivers..."

"This is a critical juncture for the U.S. energy renaissance, as we need cogent energy and trade policies to sustain it." He urged policymakers to reverse course on the tariffs and subsidies.

Separately, API reported in its Industry Outlook for 3Q2018 that U.S. LNG exports are expected to exceed 3.0 Bcf/d during the quarter, compared with 1.7 Bcf/d in the year-ago quarter. It cited figures from EIA, Bloomberg and Baker Hughes, a GE Company. Although the third quarter officially ends on Sunday (Sept. 30), API considers trends and concepts not beholden to the actual end of the quarter.

API also reported that EIA data shows a "demand-limited market," under which domestic gas prices fell despite record market growth. The trade association also seized on EIA's separate assertions that "drilling specifically for natural gas has become increasingly predominant and cost-effective in the U.S.," and that U.S. natural gas markets hinge "on LNG exports and, to a lesser extent, industrial and power growth." The former was outlined an unspecified EIA monthly Drilling Productivity Report, while the latter was a takeaway from EIA's Annual Energy Outlook (AEO) for 2018.

Under the AEO reference case, net exports of U.S. gas between 2018 and 2040 are projected to be 18.8 Bcf/d, while gas used for electricity generation would average 3.1 Bcf/d. But under a high development scenario, exports over the same time frame could average 29.2 Bcf/d and electricity generation could average 15.7 Bcf/d.

"Without the healthy evolution of LNG markets and continued free trade, upstream U.S. natural gas development could be stymied," API said.

EIA data also showed that during 3Q2018, the United States is projected to become a large net exporter of natural gas for the first time. Gross exports between January and June averaged 9.3 Bcf/d compared to gross imports of 8.4 Bcf/d -- for a net export average of 0.9 Bcf/d. EIA estimated that gross exports will average 10.1 Bcf/d and gross imports will average 7.3 Bcf/d in September, equating to a net export average of 2.8 Bcf/d.

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