Natural gas development costs in the United States are rising, stung by rising consumption, inflation, supply chain issues and labor shortages, all of which are eating away at the margin, according to Moody’s Investors Service.

The credit ratings agency recently hiked its medium-term Henry Hub natural gas price range by 50 cents to $2.50-$3.50/Mcf. The price estimate is designed to help determine at what gas price exploration and production (E&P) companies may reinvest profitably. 

The updated price range “marks the return to our medium-term price range before the pandemic, and reflects our expectation that inflation in natural gas production costs is rising,” said Moody’s Elena Nadtotchi and Steven Wood.

[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]

The average cost to produce “a marginal unit of natural gas” is rising as oilfield services (OFS) providers fetch more for as expenses increase. 

An “accelerating turnaround” in the OFS sector has led to rising costs and production, while the operators also are working to rebuild, Nadtotchi and Wood wrote. E&Ps have claimed significant efficiencies and reduced costs since 2019. However, their ability “to offset rising production costs will now diminish.”

Fluctuating Prices, Geopolitical Risks

Regulatory and financial costs also are predicted to increase as the world works to eliminate carbon emissions, according to Moody’s. Each cost to reduce carbon emissions boosts the price to produce a marginal unit of gas, the credit analysts noted.

“We expect prices to fluctuate and routinely pierce the boundaries of the range that we estimate the U.S. natural gas industry needs to support profitable reinvestment,” Nadtotchi and Wood said. “In fact, we see unprecedented volatility and record high international spot prices as indications of acute distress in the global natural gas market in 2022-23.”

The global natural gas market has begun shifting sharply because of the geopolitical risks including the sanctions on Russia. Concerns “about insufficient supply” and the efforts by Western Europe to diversify gas supplies.

The Moody’s team also foresees “continued dislocation in coal markets, which would accelerate demand for U.S. natural gas ahead of increases in domestic gas supply.”

Power generation, they noted, “is the leading factor in U.S. domestic natural gas demand,” while electric utilities often alternate between coal and gas, depending on which is cheaper. “Because coal prices in 2022 are rising more quickly than Henry Hub prices, natural gas remains competitive and utilities are delaying switching to coal from gas, even as Henry Hub prices climb higher.”

Domestic liquefied natural gas (LNG) exports “are becoming the second-most important factor for demand,” said Nadtotchi and Wood. The Energy Information Administration is forecasting U.S. LNG exports to increase by 25% this year, reaching 12.2 Bcf/d. In 2021, LNG exports averaged around 9.8 Bcf/d.

“Because forward contracted sales substantially underpin this capital investment, there is very limited immediate availability of additional U.S. LNG volumes in 2022-23,” the Moody’s team noted. 

“We expect natural gas prices in the U.S. to remain elevated and above our medium-term price range in 2022-23. Yet, the U.S. natural gas market will remain somewhat insulated from the extreme volatility of the international natural gas markets, because the U.S. domestic market benefits from its significant production.”