The Last Barrel

In 1982, I was working for a small independent that operated several gas wells in eastern Oklahoma. The wells produced high-Btu wet gas that was selling for around $0.25/ MMBtu, when the low-pressure gathering system would take production. In western/southeastern Oklahoma, home of the mighty Morrow and Spiro gas wells, producers were selling their product for around $2.25-$2.50/ MMBtu. But any sign of a warm winter would send HH benchmark prices crashing downward, along with the rig count. Although natural gas prices have spiked over the last several years, logistical and transportation challenges, along with oversupply, have historically stymied a sustained price rally. However, aggressive environmental regulations combined with the lingering impact of Covid-19 have finally made gas a valued commodity instead of a by-product.

Asian LNG market key for U.S. suppliers. As energy consumption rises, particularly in Asia, and the world shifts towards cleaner fuels, global demand for LNG is expected to double to 700 MMt by 2040 (Shell). LNG is forecast to play a significant role in shaping a lower-carbon future, with around 80% of global energy demand growth forecast to be met by renewables and gas (Trelleborg). However, supplying LNG to the growing Asian market has become more expensive for U.S. producers. Even so, U.S. exporters are unlikely to repeat last year’s cost-related shut-ins as global demand has rebounded to strong levels. Instead, U.S. LNG exports climbed to a record monthly high of 6.5 million tonnes in May and could keep rising to new peaks.

Price keeps climbing. Estimates that the short-run marginal cost (SRMC) of U.S. LNG exports to the Asian market has risen to about $5.60 per MMBtu as of June 2021, up 65% from $3.4/MMBtu in mid-2020 and 30% higher than last year’s average of $4.30 per MMBtu. The operational liquefaction projects globally have risen this year due to a jump in transportation costs for LNG, driven by higher charter rates and fuel costs. Costs in the U.S. have also been boosted by a recovery in domestic gas prices.

Despite the lower SRMC of LNG to Asia last year, the U.S. was still the most expensive supplier globally. As the TTF gas prices in Europe and Asian spot LNG prices fell below $2/MMBtu in mid-2020, U.S. exports took the largest hit, resulting in shut-ins as buyers canceled cargoes. Rystad Energy estimates that about 12 Mt of U.S. LNG exports were shut in last year as a result of the market crash. The company does not see any signs of LNG shut-ins in 2021, but does anticipate a shift in the SRMC of global LNG and in the cost-of-supply curves. Instead, U.S. LNG production will reach 72 Mt in 2021, its highest annual level on record.

Dutch LNG goes global. A boom in trading Dutch natural gas is showing no signs of slowing as interest from outside Europe continues to grow. Traders of the region’s benchmark gas contracts based beyond Europe have increased 164% since 2016, according to Gordon Bennett, ICE Futures Europe. “TTF is becoming a global gas marker, it is the Brent of the gas market.” As European gas supply contracts continue to move away from long-term oil-indexed pricing, Dutch virtual trading hub Title Transfer Facility has become the most widely used interchange on the continent. The number of traders using TTF has surged 83% between 2016-2020, Bennett said. Meanwhile, TTF futures have registered records in open interest throughout May, according to data from ICE.

Qatar can’t meet demand. Qatar, the world’s largest exporter of LNG said it’s unhappy prices are so high but is producing at maximum capacity said Energy Minister Saad Al-Kaabi. Although Qatar is spending billions to increase output, it will struggle to boost production in the near term. Qatar produces 80 million tons a year and has the world’s lowest production costs thanks to an abundance of easy-to-extract gas. Qatar aims to increase LNG output by around 50% by 2027, a project that will cost $30 billion.

Russia cautious with its supply. Gazprom increased its 2021 price guidance for natural gas exports, while signaling caution on volumes it could ship, as Europe’s energy crisis worsens.The Russian company, which is Europe’s largest supplier, reiterated that shoring up inventories at home was its top priority. Only after it has refilled its own storage facilities by the end of October, would the company look at potentially increasing exports to continental Europe. Gazprom increased its full-year gas-price guidance for exports to Europe and Turkey to a range of $295 to $330/1,000 m². The revised outlook on Gazprom’s average prices in the region is good news for the company’s investors as it signals higher dividends may be coming.

Despite value, waste continues. Oil producing countries could lose $82 billion/year due to gas flaring, according to GlobalData. Even though technological solutions exist to avoid flaring, many countries persist with the activity—including the U.S. and Russia. Besides lost revenue, this is also an environmental issue, as gas flaring is one of the major contributors to CO2 emissions.

“It would do many countries, especially in Europe and Asia where natural gas prices are setting all-time records, if they found the strategy to sell this gas rather than lose it—not only for the revenue but for meeting their CO2 targets,” says Anna Belova, GlobalData. The biggest gas flarers account for 87% of all flared gas in 2020, were Algeria, Angola, Indonesia, Iran, Iraq, Libya, Nigeria, Malaysia, Mexico, Russia, the U.S. and Venezuela. The top 12 gas-flaring countries flared 13 Bcfd. That amount of gas could keep Japan supplied for a year.

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com