The last barrel: The Trifecta for U.S. gas producers

The abundant supply of natural gas in the U.S is starting to pay dividends, in spades. The U.S. became the world’s number-one exporter of liquefied natural gas for the first time ever in December, as deliveries surged to energy-starved Europe. Output from U.S. facilities edged out Qatar after an increase in exports from Sabine Pass and Freeport facilities. In December, Cheniere Energy reported that a new production unit at its Sabine Pass plant in Louisiana produced its first cargo. 

Shale gas boom. Similar to the shale oil play, the shale gas revolution benefited from the development of extended-reach horizontal drilling and high-tech staged fracing techniques, although much of the natural gas is produced as a by-product of crude output. And natural gas prices have spiked over the last several years, but logistical and transportation challenges, along with oversupply, have historically stymied a sustained price rally. 

However, the advent of a viable LNG industry, coupled with billions of dollars of investments in liquefaction facilities, transformed the U.S. from a net LNG importer to a top exporter in less than a decade. Gas production has surged 70% from 2010, and the U.S. is expected to have the world’s largest export capacity by the end of 2022, once Venture Global LNG’s Calcasieu Pass terminal comes online. 

Qatar and Australia. But the U.S.’s position as top LNG shipper may be short-lived. Exports were slightly higher than those from Qatar and Australia, and any production issues could affect the rankings. But the jump in U.S. LNG exports will help ease a global supply crunch. Europe is facing a winter energy crisis, as utilities grapple with seasonally low natural gas inventories. U.S. LNG export terminals sent out a record 1,043 cargoes in 2021, with Asian nations making up nearly half of the destinations and Europe accounting for one-third. 

Price escalation. Although prices have spiked in the past, logistical and transportation challenges, along with oversupply, have historically stymied a sustained commodity rally. But record demand and the ability to ship product has certainly changed the outlook for gas producers. At the end of January, U.S. natural gas futures surged the most on record, a dramatic move that signaled bearish wagers are being squeezed out of the market. The astonishing increase of 72% came ahead of the expiration of the February contract, which was thinly traded, as weather forecasts turned colder. A spokesperson for CME Group confirmed the price spike was the most since the contract launched in 1990. The more-active March contract saw a gain of less than 10%. 

Gas prices have been volatile in recent weeks, as traders try to gauge whether winter cold will strain stockpiles of the power-plant and heating fuel. The chillier shift in the weather outlook near the futures expiration contributed to the sharp increase in prices. In a short squeeze, traders exposed to wrong-way bets on lower prices rush to close out those positions by purchasing higher-priced contracts. 

Although U.S. gas inventories are about 1% below normal for the time of year, exports have been near a record, and production from shale basins has been restrained. The February contract settled at $6.265 MMBtu, the highest close since October. The gas-futures market has grown increasingly vulnerable to such an event in the last three months, as surging volatility prompted some investors to withdraw, reducing overall liquidity. 

U.S. NGL output surges to record high. Natural gas liquids (NGL) output from processing plants in the U.S. hit a new record high in November 2021, reaching 5.84 MMbpd as a result of a recovery in Gulf of Mexico supplies, post-Hurricane Ida, and improved ethane processing efficiency (Rystad Energy). The surge has helped push total U.S. hydrocarbon liquids output up to 17.3 MMbpd, almost back to pre-Covid-19 levels. The new U.S. record-high NGL production in November was 60,000 bpd higher than the month before and 240,000 bpd more than in September 2021. Texas and New Mexico’s combined NGL output hit a new all-time high of 3.3 MMbpd in November, growing about 10% through the second half of 2021. The rest of the country accounted for the remaining 2.5 million bpd of NGL in November. 

As a result of this robust growth, total hydrocarbon liquids production in the U.S. is approaching pre-Covid-19 levels. Liquids output, including crude, lease condensate and NGLs, surpassed 17.6 MMbpd in November, representing an 8% increase over the year, and approaching the 18-MMbpd record set during first-quarter 2020. Regionally, liquids production in the Permian reached 2.07 MMbpd in November, a new record high and 8.5% greater than the first-quarter 2020 basin average. However, other major oil regions are still underperforming their pre-pandemic output, lagging their first quarter 2020 average by 13%. 

The Permian is the indisputable driver of U.S. NGL output growth. The surge in production is a result of robust associated gas output and improved ethane recovery while rising crude oil and lease condensate production from the Lower 48 states and the Gulf of Mexico have helped total liquids production rebound to near pre-pandemic levels. 

Seizing the opportunity. Our industry leaders have done a masterful job of managing and growing LNG infrastructure and markets. U.S. LNG exporters have secured numerous customers, which is positively impacting each regions’ economy. History has shown that being in the right place, at the right time, with the right product (at a competitive price), is key to building a loyal customer base and establishing long-term trade relationships. The developing U.S. LNG export play is gaining traction and offers producers a major opportunity, which if effectively managed, will benefit the natural gas industry and U.S. economy for decades to come.  

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com