Tightening Market Boosting Gas Prices as Exports Boom
The U.S natural gas market may be poised for a return to its traditional volatility as record power burn and rapidly growing exports are colliding with flat production, analysts are beginning to warn.
After years of growth from hydraulic fracturing, production in April 2016 fell year-over-year for the first time since 2006, according to the U.S. Energy Information Administration (EIA). The natural gas rig count fell under 100 earlier this year and currently stands at 89 as of July 15. This is a drop of nearly 90% since early 2012.
Gas Prices Rise, LNG Exports Begin
Though Henry Hub spot gas prices remain below the $4/MMBtu levels seen in 2014, they have begun rising again after falling below $2 last year and this spring.
Meanwhile, exports of liquefied natural gas (LNG) have begun in earnest this year. Cheniere’s Sabine Pass Terminal in Louisiana has now sent out 15 shipments of LNG since the first liquefaction train began operations, mostly to Asia and South America but a few to Europe as well.
According to EIA data, LNG exports totaled around 10 Bcf in March and April, with the largest share going to Argentina. Those numbers will rise as the additional trains at Sabine Pass come online and other terminals currently under construction are completed next year.
Mexican Standoff?
One area of concern is rapidly growing exports to Mexico, driven by growing demand and falling production in that country.
According to Ross Wyeno, senior energy analyst with Platts Analytics’ Mexico Energy Monthly, “Exports to Mexico represent the single fastest growing demand component, having risen to 3.5 Bcf/d, year to date, a 32% build over 2015.”
Exports to Mexico reached 3.8 Bcf/d for the week of July 14–20, according to the EIA.
Domestic Mexican gas production has been falling slowly for years, even as demand has grown as the county continues building out its gas-fired generation capacity. Gas remains the nation’s primary fuel source for electricity, but gas has actually lost some market share this year because of rising electricity demand.
The demand for natural gas in Mexico is such that U.S.-Mexico pipelines have been unable to fully meet it in all regions of the nation. Imports of LNG have jumped sharply in Q2 this year, particularly at the Manzanillo terminal on the Pacific coast, Platts said. A number of new pipelines to Mexico are in various stages of development, most of them running south from Texas. That sets the stage for continued export growth (Figure 1).
“Both latent demand, gas infrastructure development, and LNG displacement is set to drive U.S. exports to Mexico above 5 Bcf/d by 2020,” Wyeno said.
Liberalization of the Mexican energy market may bring some relief, but it will likely be years before significant effects are seen, observers say.
—Thomas W. Overton, JD is a POWER associate editor (@thomas_overton, @POWERmagazine).