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Where Does U.S. Natural Gas Production Go From Here?

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Surging U.S. natural gas production via “fracking” has been the key gas story globally since the shale revolution took flight in 2008.

From 2008 to 2019, U.S. output increased nearly 70% to 34 trillion cubic feet (Figure).

The U.S. now produces about a quarter of the world’s gas and a staggering 35% more than second place Russia.

In turn, Americans have enjoyed likely the lowest natural gas prices in the world, averaging under $3.00 per MMBtu since 2012, compared to over $7.00 from 2000-2009.

What goes under-appreciated is that much lower prices should actually be working to curtail output because they drop revenues and make more resources less available for extraction.  

Indeed, it goes routinely forgotten that, just like renewables, the U.S. shale industry is constantly evolving and deploying more efficient technologies.

Since early-2020, however, it has been a rough ride for U.S. gas producers through the destruction of Covid-19.

After annual increases of 13% in 2018 and 11% in 2019, U.S. gas production in 2020 fell 1-2%.

But this was bound to be the case: in 2020, crude oil prices dropped 30% to average below $40 per barrel and gas prices averaged just $2.05, their lowest level in decades.

And freeze offs from the great Texas energy crisis in February triggered the largest monthly decline in U.S. gas production on record

Over the past 16 months, U.S. gas production has more or less stagnated, averaging ~91 Bcf/d (right now being a maintenance time of the year).

The U.S. Department of Energy expects this to continue in 2021 but rise to over 93 Bcf/d next year, as prices are forecast at well above $3.00.

June 2020 gas prices collapsed to below $1.50 but current June 2021 prices are nearly double that.

And just as importantly, much higher oil prices should help bring on more U.S. associated gas that comes along as a byproduct of crude oil, a really big deal in Texas.

In fact, the Permian basin in West Texas, which usually has a zero or just one gas-directed rig count, yields over 17.3 Bcf/d, 20% of U.S. supply and more than any foreign nation except Russia and Iran (it is about equal to Qatar).  

Rystad Energy estimates that the U.S. shale industry is set for record revenues this year if WTI crude can average $60 per barrel, right where it has been for 2021 thus far.

Higher natural gas liquids prices are also supporting the industry.

Producers could then expect $195 billion before factoring in hedges.

One hedging analysis reports that the average swap price for natural gas is $2.69 in 2021 and $2.58 for 2022, with the average put price (non-three way) for the same years at $2.54 and $2.50, respectively.   

Especially since inflation is now at highs not seen since 2008, the $2.50 natural gas price stands as a hard floor and held for the previous three years prior to the obvious anomaly year of 2020.

Yet still, U.S. shale gas (and oil) producers must be cautious to not overproduce.

The days of double-digit annual percentage increases should be over.

Pioneer Natural Resources

PXD
’ CEO Scott Sheffield thinks that the shale industry should consolidate more to maintain operational and curb volume increases from smaller producers – firms that need more production to pay down debt.

Moreover, the smaller players are less tangled in the ESG web and typically go under the radar of environmental groups obsessed with “Big Oil:” “Energy Giants Ditch Oil and Coal Projects. Smaller Rivals Want Them.”

Looking forward, one of the main reasons why gas futures are still quite low is the optimism around production.

For example, as of now (mid-May), gas prices for winter 2029-2030 are $3.00.

The U.S. Department of Energy’s National Energy Modeling System has generally had domestic production outpacing domestic demand by a 2-1 margin for many years, or even decades, to come.

And with prices so low and the infrastructure already installed (at 530,000 MW, gas accounts for 45% of total U.S. power generation capacity), gas clearly will remain a cornerstone.

President Biden’s climate goal is to half the country’s greenhouse gas output in 2030 from 2005 levels, which equates to needing to cut nearly 2.9 billion tons of gross annual emissions.

This potentially could mean a 70-80% reduction in greenhouse emissions from the power sector.

Coal is probably the low-hanging fruit because it still generates 20% of U.S. power.

Reality check: in most markets, the electricity competition is still between gas and coal, not gas and renewables.

For example, the U.S. Department of Energy predicts a 20% boom in U.S. coal power generation this year specifically because of higher natural gas prices. 

Very importantly, even in renewables-obsessed, much higher cost Europe, where population growth and incremental energy needs are small-scale, the Union recently included more natural gas as part of its climate plans to reach net-zero carbon.

The U.S. gas industry, however, knows that it must continue to make progress on slashing methane emissions and leaks – crucial for enhancing its ESG positioning.

After all, while methane is a greenhouse gas, natural gas is 95% methane, meaning that methane is a product that the industry naturally wants to capture.

And an oil and gas price spike could loom on the horizon to lift revenues even more: a lack of upstream investments in new supply is bound to collide with rebounding demand. 

Higher prices this year are having material benefits: “Don’t Tell Anybody, But Frackers Went on a Hiring Spree.”

Quietly the largest U.S. gas producer, Pittsburgh-based EQT

EQT
just announced a “transformative” $2.9 billion purchase of Alta Resources.

The liquefied natural gas export build-out will also incentivize new domestic gas production, evolving into an increasingly sustainable product to reach climate conscious buyers in Europe and elsewhere.

To conclude, the U.S. shale revolution has been in full force for 12 years, but I think that the industry just now might be waking up to the fact that we could have much higher prices and Americans would still require massive amounts of oil and gas.

The Colonial pipeline attack just demonstrated how entrenched these commodities really are in our daily lives – not nearly as replaceable as some suspiciously insist that you think.

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