NGI: Record Production, Warm Winter Squashes Natural Gas Prices

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--There seems to be more than enough natural gas being produced for use, storage and liquefied natural gas (LNG). How does that play out for prices and future production? That's the subject of a 32-page report issued by Natural Gas Intelligence (NGI), entitled "Future in Focus, Navigating the Globalization of Natural Gas Prices and Supply." NGI polled a cross section of experts and analysts for this paper.

Nationally, storage levels in December were about 10% above five-year averages, said NGI. In Mountain Regions, including the Rocky Mountains, they were 31% above five-year averages. Also, several times in 2023, total Lower 48 U.S. natural gas production topped an all-time record of 106 billion cubic feet per day (Bcf/d), including the last week of the year. This put downward pressure on gas prices and rig counts steadily dropped during 2023. Will that lead to an eventual fall in production?

Maybe.

There's Plenty to Go Around
The good news is that unlike crude oil, the U.S. produces 90% of the natural gas it consumes, importing 10% through pipelines across the border from Canada. The report quotes NGI's Patrick Rau, director of strategy and research, as saying the U.S. "certainly has the inventory to supply 100%, if necessary. No one is worried about where the U.S. will get gas in 2024."

For producers, the bad news is that in December, 2023, NGI Bidweek (the last five business days immediately preceding the first of each month) gas prices were $3.325/million British thermal units (MMBtu), less than half the 2022 whole-year average of $8.395. In light of those prices, why have U.S. producers continued to hit record production levels?

The reasons are somewhat complex, but they start with producer optimism about planned LNG facilities, according to analysts. Even with the Biden administration's pause on new authorizations, those already authorized will not be affected, and they are many. And eight new pipeline projects are continuing, which are expected to bring more gas to LNG facilities mostly in 2025 according to the report.

Another reason is that one key driver in natural gas production upticks is the increasingly-gassy oil production in the Permian Basin. The report quotes U.S. Energy Information Administration (EIA) data as showing December 2023 production in the Permian Basin at 24.2 Bcf/d, up from 21.4 Bcf/d in 2022. Because Permian gas is a byproduct of the profit center, crude oil, suppliers there have no incentive to curtail production as long as the gas has somewhere to go, NGI notes.

Rigs Drop, Production Doesn't
December rig counts were down 23% from 2022 levels, even as production reached record levels. The reason involves updated drilling techniques. NGI quotes Enverus' (Austin, Texas) Jason Feit, vice president of intelligence, as saying the rig count "tells us less than it used to because we've seen longer lateral lengths and better efficiencies in drilling, which have kept production growing even with fewer rigs."

Optimism: Seasonal Usage Starting to Flip
Warmer winters mean less gas is needed for heating, but correspondingly warmer summers mean more gas is used in power generation for air conditioning. NGI's paper says, "The International Energy Agency (IEA) said in December that in late August, for the very first time, the United States met more than one-half of its electricity demand from natural gas, encapsulating a summer during which gas-fired electricity generation grew dramatically." Additionally, the EIA says overall natural gas demand grew by 3% compared to 2022, even with the warmer winters, as more gas-fired power stations replace coal.

Production Reduction, Anyone? No Thanks, You Go First
Enverus' Feit is quoted as saying that, even if producers are contemplating cutting rig counts enough to reduce production, they want someone else to go first: "...when producers realize there's too much production, a lot of times everyone will agree it needs to be reduced, but no one wants to be the first one to lower production. You get a period of time where everyone's waiting for someone else to cut their production so they don't have to. No one wants to be the one to have to blink first."

International Competition
The U.S. isn't the only source of LNG increases. The report notes that majors are investing in new LNG facilities in Qatar. And in the Eastern Mediterranean, "Since the invasion of Ukraine, Egypt has exported more than 4 mmt (million metric tons) of LNG to Europe, fed by Israeli offshore production via pipeline connections with Jordan." In 2022, the report notes, Egypt, Israel and the EU signed cooperative agreements regarding LNG sales.

NGI also addresses renewable natural gas, gas vs. renewables, and how the energy industry and environmental groups are marshalling their voters for what should be a pivotal November election for both sides.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).