Era of cheap U.S. gas to end — new analysis
The U.S. has become the largest LNG exporter in the world because of enormous volumes of cheap gas. But that may soon come to an end.
Cheap natural gas in the U.S. may soon be coming to an end, according to a new analysis.
The U.S. is the largest exporter of LNG in the world, and will likely send more than 100 million tonnes of LNG around the world this year, supplying markets across Asia and Europe at a time of massive upheaval in global energy markets.
The U.S. gas export behemoth has been possible because of the enormous volume of cheap gas that is extracted from shale basins across the country. Gas is pulled out of the ground in Texas and Pennsylvania, liquefied at terminals along the U.S. Gulf Coast, loaded onto a ship, and sent to Japan, Korea, or Germany, where it can be sold at a price that is three or four times higher than what is found in the U.S.
The main U.S. benchmark price, Henry Hub, has traded between $2 and $3/MMBtu for much of the past two decades.
However, after twenty years of extraction, the best reserves have been drilled and producers are facing depleted reserves and rising costs, according to a recent Wood Mackenzie analysis. At the same time, demand continues to rise from the proliferation of data centres and LNG export terminals, putting upward pricing pressure on gas supplies.
“As the highest-quality portions of Marcellus, Permian and Haynesville are developed, remaining inventory will be less productive and more geologically complex,” WoodMac analysts wrote. “Breakeven costs have stopped falling. Technology gains in mature plays are incremental rather than transformative.”
Drillers are increasingly forced to venture further out from top-tier acreage, expanding into underdeveloped shale formations such as the Western Haynesville, where costs can be three times higher than legacy Haynesville shale wells.
“With supply less responsive to price signals than it once was, prices will need to go higher and stay higher to bring new molecules to market, particularly from dedicated gas producers,” said Dulles Wang, director of gas and LNG research for the Americas at Wood Mackenzie.
The competitiveness of U.S. gas is getting squeezed on the demand side as well. The U.S. has 116 million tonnes of annual LNG export capacity (mtpa), but there’s another 105 mtpa under development. Export capacity is slated to double by 2030.
Even as a growing portion of American gas production is diverted overseas, the rapid proliferation of data centers is claiming a growing share of the gas supply. According to WoodMac, the U.S. could add 17 billion cubic feet per day of additional power sector demand by the mid-2030s, equivalent to roughly 15 percent of total current U.S. output.
“The conditions that kept Henry Hub between US$2 to US$4/mmbtu for the best part of a decade are no longer all operating at full force,” said Kristy Kramer, head of LNG strategy and market development at Wood Mackenzie. “Rapid play development, near-zero-cost associated gas, and year-on-year productivity gains drove that era of cheap, stable prices. Those tail winds have largely run their course. Prices will need to rise to grow supply from here.”
WoodMac sees U.S. Henry Hub prices rising to $5 per MMbtu by 2035.
Rising upstream costs will undercut, to some extent, the competitiveness of U.S. LNG, compressing margins and increasing the financial risk for new LNG projects. It also raises the risk for offtakers, particularly the portfolio players that take cargoes and try to flip them for a profit to end users overseas.
“The scale of the US LNG position may look like a commercial advantage,” said Kramer. “But as the US moves past one-third of global LNG supply in the early 2030s, buyers are already asking questions about over-reliance on a single supply source. Those questions will only get louder.”