November 2016, Vol. 243, No. 11


Is the Era of Cheap Natural Gas Over?

By Nick Cunningham,

Natural gas prices have been low for years as shale gas drillers continued to break records with higher and higher production. But just as the oil markets have gone through a very painful bust that is leading to a drop-off in supplies, the market for natural gas is going through a similar period of adjustment. Not only that, but demand is on the rise, with a wave of new gas-fired power plants coming online. The result is a much tighter market for gas than we’ve seen in years.

Before there was a boom in oil production in the United States, the shale gas revolution led to massive flood of new supply, which sent prices careening downward. Natural gas spot prices are always volatile, but have largely traded below $3 per MMBtu since 2014. With prices so low, companies pared back drilling and focused much more on liquids-rich and oil-heavy shale plays.

But a funny thing happened: instead of a subsequent crash in natural gas production as drillers pulled rigs from the field, output continued to rise, setting new records along the way. Part of that had to do with impressive advancements in drilling technologies and techniques, allowing companies to extract more gas for less money and with less effort. Another reason that gas output kept climbing was because a lot of gas is produced in conjunction with oil. The drilling frenzy for shale oil ensured that the gas kept flowing.

But the crash in oil prices put that to an end. Both oil and gas rig counts plunged and natural gas production finally peaked in the U.S. and begun to decline. After hitting a high watermark in February 2016 at 92 Bcf/d, production has since shrunk by 5%.

Meanwhile, on the demand side of the equation, the trajectory is only on the upswing. Years of low natural gas prices have led to a huge uptake in the electric power sector, hollowing out the coal industry, and leading to the construction of new gas-fired power plants at a frenzied pace.

In years past, existing natural gas plants were simply used more, as low spot prices meant gas plants were cheaper to run than coal plants. But now an entirely new generation of power plants is coming online, which will ensure demand continues to rise into the future. The new plants are like a one-way ratchet, ensuring a structural increase in demand and not just a cyclical increase, as John Kemp of Reuters recently noted.

The U.S. has seen 25 gigawatts of new gas-fired electrical capacity added since 2012, bringing the gas fleet up to 448 GW. Another 11.5 GW will be commissioned by the end of next year as well. This is happening at the same time that utilities are rushing to shut down old coal-fired power plants, many of which have become unviable in a world with cheap gas and increasingly cheap renewable energy.

In short, the market for gas is seeing rising demand and falling supply, a recipe for a much tighter market. But that landscape is a 180-degree turnaround from what many analysts thought as recently as a few months ago. Last winter, mild temperatures led to lower-than-expected demand, and the record levels of production caused inventories to swell to levels not seen in years. On the heels of that incredibly bearish trend, prices dropped to their lowest point in nearly two decades in March. It was not hard to imagine several more years of rock-bottom prices.

But the most recent summer saw an unusual phenomenon play out, altering the expectations for natural gas prices. A time of year when inventories typically build, ahead of the annual spike in winter demand, the U.S. saw extraordinarily tepid increases in storage. That should not be surprising, given that production began falling this year, but the weak summer storage build did catch the market off guard. Now natural gas prices have risen to $3/MMBtu for the first time in nearly two years. On Oct. 10, during midday trading, Henry Hub was up another 2.6% to $3.28/MMBtu.

Things could grow tighter still as the same trends that led to the market to tighten are not going away: supply is falling, demand continues to rise (and will spike in the winter for heating needs), and storage levels are converging back toward average levels.

The era of sub-$3/MMBtu gas could be over for a while.

Offering a different outlook, Robert Jones of CBC News writes that natural gas users in New England could see price cuts thanks to two new U.S. pipelines, ending a spiral of price spikes that have troubled consumers the Maritimes over the last three winters.

“It’s going to have higher capacity to bring more gas up from the United States which should lower the cost of the commodity so that’s our expectation,” said Enbridge Gas New Brunswick general manager Gilles Volpé. ‘There are no guarantees, it’s a commodity. But that’s what we’re planning for, that there’s going to be a continued reduction of the price of gas.’

The pipeline projects have both been undertaken by Spectra Energy, which is in the process of being purchased by Enbridge. One of the pipelines is the Algonquin Incremental Market (AIM) Project. It is under construction and scheduled to be in service in November. The other, the Atlantic Bridge, is expected to be operational by next fall. Both are designed to free up a distribution bottleneck that has prevented low-priced U.S. shale gas from reaching the Northeast.

Although not yet operational, they are already helping drive prices. Futures prices for this winter are well below what consumers in New Brunswick and Nova Scotia paid last year, with prices for next winter trading even lower than that.

“The AIM project will be the first relief to the region,” said Spectra Energy’s Marylee Hanley. “The Atlantic Bridge project will follow right behind it one year later.”

The pipeline projects have both been undertaken by Spectra Energy of Houston Texas. (Courtesy of Spectra Energy)

Natural gas prices in New England and the Maritimes have consistently been the highest in North America. They’ve been hitting levels three and four times higher than elsewhere on the continent over the last three years, especially during the winter. February 2014 was the worst pricing crisis for natural gas. Consumers were being charged up to $52 per gigajoule for the fuel, the oil equivalent of $300 per barrel. The amount is believed to be a North American pricing record, Jones says.

Pricing problems were caused by steep declines in the supply of Nova Scotia offshore gas, which traditionally fed the Maritime and New England market. The issue also came from a lack of pipeline infrastructure in the U.S. able to replace those shortages with new supplies of shale gas from the Marcellus region.

Combined, the AIM and Atlantic Bridge projects are expected to deliver 500,000 gigajoules per day of cheap shale gas into the New England market, 70% of that beginning this month. It’s more than double the production of Nova Scotia’s offshore. It’s hoped that will be enough natural gas to end winter time shortages and expensive price spikes from Boston to Halifax.

Even if the gas itself does not reach the Maritimes, it is expected it will ease supply problems enough to lower and stabilize prices across the region, Jones writes.

Last month Halifax-based Corridor Resources announced prices it negotiated for this winter are the lowest yet, 30% below last year’s negotiated price. Corridor has pre-sold wintertime natural gas from its New Brunswick operation into New England for the last four years. The company said it made the deal because it had concerns natural gas prices in the region this winter could drop further.

In New Brunswick, Enbridge, the province’s natural gas utility set its October natural gas price for consumers, not including distribution charges, at $8.10 per gigajoule. That’s 26% less than last October and 48% less than October 2014.

Volpé said he hopex completion of the second of the two pipeline projects next fall, the Atlantic Bridge, will help lower prices further. “There are no guarantees, it’s a commodity. But that’s what we’re planning for, that there’s going to be a continued reduction of the price of gas.”

Related Articles


{{ error }}
{{ comment.comment.Name }} • {{ comment.timeAgo }}
{{ comment.comment.Text }}