Increasing Exports Are Saving U.S. Gas Producers from Warm Winters
by Bob Shively, Enerdynamics President and Lead Facilitator
The outlook for U.S. gas producers as we headed into this winter looked difficult. While natural gas production dropped somewhat during 2020, it remained at levels significantly higher than anytime prior to 2018.
Meanwhile U.S. gas demand remained below levels experienced in 2018 and 2019.
The result was that amounts of gas in storage hit all-time highs. Gas prices that rose in the fall of 2020 in anticipation of winter began dropping again. Gas producers looking for a price boost were hoping for cold winter weather that would result in furnaces and power plants cranking up and consuming the extra gas sitting in storage.
Instead, at least to date, a second warmer-than-normal winter has muted demand, and prices in the middle of January are no higher than they were at the start of December. The effect of mild weather can be seen by the graph below, which shows Henry Hub near-month future prices in blue and weather outcomes compared to normal. Green indicates a measure of heating requirements called 'heating degree days' or HDD, and red indicates a measure of air-conditioning requirements called 'cooling degree days.' Both are below normal for 2020 and early 2021.
So what has kept Henry Hub prices from cratering? Fortunately for gas producers the situation in Asia is just the opposite of the U.S. Extremely cold weather in Asia coupled with limited availability of LNG tankers drove Asian gas prices up over 80% from at the start of 2021. U.S. LNG export terminals have scrambled to move as much supply as possible but are limited by constraints in the Panama Canal and by availability of tankers. Even with these constraints, LNG exports have grown significantly.
And now, between pipeline exports to Mexico and Canada, and LNG exports, exports have become a key factor in overall demand served by U.S. gas supply. Indeed, in 2021 net exports are forecast by the U.S. Energy Information Administration (EIA) to be close to 12% of overall demand for U.S. gas, which is more than commercial gas demand. As more cities and states push for electrification of gas loads and replacement of gas generation with renewables, exports may be the only bright spot that gas producers can see looking to the future.
The EIA indicates net exports are expected to continue to grow with forecast increases of 29% in 2021 and 9% in 2022 compared to the prior year. While this is promising for U.S. producers, they cannot simply sit back and expect it to occur without challenges. Other producing countries such as Australia, Qatar, and Russia will be prime competitors for market share. And recently European buyers have asked producers to demonstrate reductions in the greenhouse gas (GHG) emissions associated with their gas. Reportedly one deal from a new LNG terminal in the Gulf was scuttled by a European buyer in favor of Qatari gas because the Qatari’s promised to do more to reduce GHG emissions in their production chain. It seems to be a reoccurring theme in the gas business that producers can never rest, but must continually be preparing for the next challenge.