Ten years ago, Just Dance by Lady Gaga was the hit song, the Celtics beat the Lakers for the NBA Championship, the financial markets were getting ready to melt down and barely a drop of natural gas was being produced from the shale regions. While all things come to pass – with the exception of Lady Gaga who still is a righteous singer – the shale revolution has shifted global energy fundamentals for generations to come. Here are the biggest market shifts.
Import/Export of Shale Gas and Hydrocarbons
Let’s put this production boom into perspective. For the period 2000 – 2007, U.S. natural gas production grew less than 1%. For the period 2007 – 2017, production grew by 40% and is anticipated to grow by an additional 60% over the next 20 years. Of the 80 Bcf/d of production in the U.S. today nearly 55 Bcf/d is dry shale gas production. Ten years ago, shale gas only contributed 5 Bcf/d!
In 2007, the U.S. was expected to be one of the largest, if not the largest importer of Liquefied Natural Gas (LNG). Import terminals were constructed and ready to receive LNG from the global market just as shale production started to come on the radar. Since that time, this cheap local production killed the import idea but birthed the concept of exporting LNG. Now these terminals are feverishly being modified to export LNG to the global markets. By 2025 it is expected that the U.S. will be one of the world’s largest exporters of LNG.
Finally, pipelines to Mexico and Canada are pushing more and more natural gas out of our country. We now export nearly half of the natural gas needed in Mexico. Ten years ago our net import position was around 10 Bcf/d and now we are net exporters of almost 3 Bcf/d. This new position of net exporter of natural gas and associated hydrocarbons makes us more energy independent, certainly influencing international dynamics.
Short term, this glut of production has driven natural gas prices to all time lows altering the game for participants. Prior to the shale revolution, NYMEX natural gas prices were on average 75% higher than where they are today and with much more volatility. Storms in the Gulf of Mexico would whip up the prices on the risk that production could be shut in on the drilling platforms. It would not be unusual for prices to double based on the threat of a hurricane. Ten years later, there is virtually no volatility in the natural gas market. Traders barely care about hurricanes since most of the production is in the market areas. Furthermore, basis prices (difference between Henry Hub and the market area) are consistently negative in the Appalachian region making it the cheapest gas available.
Contributing to the low prices are improvements in drilling and extraction costs. Data consultant, IHS Markit, has estimated that over 1200 Tcf of natural gas resourses can be extracted from the ground at Henry Hub prices below $4/MMBTu. At the current rate of production that equates to 41 years of production under $4!
Power Generation Shift
Ten years ago there was a renaissance of new nuclear power projects and clean coal technologies making the headlines. Nearly a dozen new nuclear power plants were in the permitting stages and many were talking about CO2 sequestration related to new coal plants. Within a few years many of these plans were completely scrapped with the advent of the cheap, abundant natural gas. In addition to the fuel economics, natural gas-fueled power generation technology became extremely efficient. The result: Manufactured electricity that is cheap, clean and offers generation plants that are easier to build than nuclear – or coal – fired power plants.
In 2007, the generation mix in the U.S. was 49% coal, 20% nuclear and 22% natural gas. Today the mix is 30% coal, 20% nuclear and 32% natural gas, a trend that is expected to continue in favor of natural gas. IHS Markit predicts natural gas to grow to almost 50% of the power produced by 2040.
The American Chemistry Council estimates there are 310 petrochemical projects currently under construction or in planning for over $185 billion in potential capital investment. This compares with $85 billion worth of projects completed since 2010. The reason for this significant increase in investment is that chemical products produced in the U.S. can now use natural gas as their feedstock while the rest of the world uses oil. Prices for the chemical products such as ethylene, acetylene, and benzene generally track crude oil, so using cheap natural gas to make these products is a huge global competitive advantage. The U.S. petrochemical industry is providing a continuous flow of investment to capture this margin, positioning the U.S. to be the leader in satisfying global demand for chemicals.
Additionally, the Oil and Gas Journal reports that the U.S. will spend $18 billion in natural gas pipelines in 2018 which is up 144% from the previous year. This capital is earmarked for the construction of over 2,800 miles of pipeline. This is major money that is being pumped into energy infrastructure. It is unlocking the value of this new energy asset and positioning the U.S. to be an even bigger global player in the future. Talk about a game changer!