Has Natural Gas in North America Become a Global Business?
by Bob Shively, Enerdynamics President and Lead Facilitator
The North American oil industry has long been globalized, with prices tied to world events and the U.S. oil majors buying and selling throughout the world. Conversely, the North American natural gas market has remained regional with Canada and the U.S. tightly correlated, but little impact from events in other world production areas or markets. This is demonstrated by looking at prices at key global trading centers.
In the mid to late 2000s, the U.S. appeared to be tight on gas supply, and multiple liquefied natural gas (LNG) import terminals were built on the assumption that growing global imports would be necessary to supply U.S. demand. During this time some correlation among prices in Europe, Asia, and North America began to surface. But then producers in the U.S. developed economic production of shale gas, and North American prices decoupled from overseas markets due to a glut of low-priced U.S. supply.
In recent years, price differentials between U.S. markets and the European and Asian markets have led to rapid demand for U.S. supply exports. Since 2018, U.S. LNG export capability has grown from about 3 Bcf/d to 14 Bcf/d. At the same time, pipeline export capacity to Mexico has grown to over 12 Bcf/d. Exports to Mexico and global LNG markets now make up 17% of overall U.S. gas demand. According to the Energy Information Administration, LNG export capacity from North America is likely to double by 2027.
Potential Future LNG Export Capacity
United States
|
7 existing, 5 under construction, 21 proposed
|
Canada
|
1 under construction, 17 proposed
|
Mexico
|
2 under construction, 6 proposed
|
Source: Natural Gas Intelligence (NGI)
And while domestic U.S. end-use consumption by residential, commercial, and industrial customers has been relatively static, consumption for power generation has continued to grow.
Source: U.S. Energy Information Administration
Does this mean we should expect U.S. prices to rise as we become part of the global natural gas economy? So far, we haven’t seen this. Although U.S. prices rose in 2021 and 2022, we have seen them fall back to below $3/MMBtu this year. Why? Largely because we continue to see U.S. production hitting new highs, with record output in October 2023. Going into winter, gas in storage is above the five-year average.
The question is this: Can a rosy picture with ongoing growth in global demand for U.S. gas coupled with limited price impacts on U.S. consumers continue? The gas futures market thinks maybe not.
Source: CME
While price increases in futures remain fairly muted through next year, significant price increases occur later in 2025 as multiple new LNG export projects are forecast to come online. Of course, predicting price fluctuations even a couple of years in advance has proven to be an iffy proposition in recent years. Factors that could reduce the globalization impact on North American gas prices include:
- reduction in domestic demand due to strategies to reduce greenhouse gas emissions;
- ongoing growth of renewable generation displacing gas generation;
- and political backlash against continued exports.
But it is also possible that North American production will fail to keep up with the growth in exports and that growing electrification of transport may result in ongoing need to utilize gas for generation even with growth in renewables. The result at some point may indeed be a sharp rise in U.S. natural gas prices to more closely match those in the major markets of Europe and Asia.
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