Natural gas sought yet prices struggle

Rarely has the natural gas business offered so much promise with so little reward.

The United States has set new records for natural gas-fired electricity generation, liquefied natural gas exports and exports to Mexico. Even industrial consumption jumped to 20 billion cubic feet per day, also a record. Consumption and exports have totaled 93.2 billion cubic feet per day in the first half of the year, a 12 percent rise over the same period in 2017, according to the U.S. Energy Department.

Demand is expected to grow even higher in the years to come. Generators are replacing old, dirty coal-fired power plants with clean-burning gas-fired turbines. A half-dozen new gas liquefaction facilities are on the drawing board or under construction. And industrial consumption at ethane crackers along the Gulf Coast is on the rise, sending plastic pellets around the world.

Yet natural gas prices hover stubbornly around $3 per million British thermal units. And according to at least one data firm, they could drop even further to as low as $2.25 this time next year.

“There is some risk to the downside,” warned Jack Weixel, a vice president at OPIS, an oil and gas data analysis firm.

Ten years ago, cheap natural gas appeared out of reach and prices ranged between $6 and

$13. But high prices encouraged drillers to experiment with hydraulic fracturing and horizontal drilling. Those techniques were so successful that prices dropped below $4 in early 2009 and have stayed low ever since.

Low prices encourage new deman66d. Natural gas power plants are cheaper to operate than coal-fired electricity generators. And in competitive markets, like most of Texas, that means historically-low electricity prices.

U.S. chemical companies have a comparative advantage now for plastics production. The ethane in natural gas is used to produce ethylene, the main component in most plastics. Exxon Mobil and other chemical companies have invested more than $140 billion in new ethane facilities along the Gulf Coast, according to my colleague Jordan Blum.

U.S. gas has become so cheap, it can compete overseas, even after adding the extra expense of cooling it into a liquid and shipping it halfway across the world.

Houston-based Cheniere Energy was the pioneer, building an LNG export facility at Sabine Pass. But since then another one has opened in Cove Point, Maryland and more are planned for the Texas Gulf Coast, including in Corpus Christi.

Shell, Petronas and their partners announced last week they would build an LNG export facility in Canada for the Asian market. The Alaska Gasline Development Corporation is expected to make a final decision on an LNG export project soon.

“The momentum behind LNG Canada reflects the drastic improvement in the LNG market over the past 12 months, driven by buoyant demand in China,” said Dulles Wang, director for North America gas at Wood Mackenzie, a commercial intelligence firm. Firms could soon make final investment decisions on other LNG projects in Qatar, Russia and Mozambique.

Not all planned LNG facilities will be built, but there are plenty of customers. Global LNG demand will grow 22 percent to 360 million metric tons by 2023, according to the International Energy Agency.

Basic economics would suggest that growing demand would drive up prices. But natural gas is not only a commodity, but also a byproduct of oil wells. High oil prices have spurred oil drilling, particularly in the Permian Basin, and resulted in skyrocketing production of what experts call associated gas.

So while gas demand this year is up 12 percent, so is supply, mainly from oil wells, the Energy Department reports. More gas is coming out of the Permian than there are pipelines to take it away. That makes Permian gas almost worthless, which is why so many drillers burn it off with flares.

This gas glut drives down prices across the country and hurts the owners of natural-gas wells across South and North Texas, North Dakota and Appalachia. And if oil prices remain high, oil wells will continue to throw off natural gas and keep prices low for the next three years.

This is bad news for natural gas producers, but good news for the public. Energy costs in the summer and winter will be cheaper, leaving people with more disposable income.

The global economy also benefits. LNG offers China a chance to wean itself off coal, and U.S. sources keep global prices down and offer an alternative to Russian suppliers.

Natural gas royalty holders are understandably disappointed by low prices, but the economic, environmental and political benefits for the planet are profound, if widely unrecognized.