Editorial: Keeping it real [NGW Magazine]

Opposition to US LNG exports, when they were still theoretical in the early years of this decade, was never very vocal in the domestic market. Apart from some politicians sticking up for the petrochemical industry on the Gulf coast, not many stuck their head above the parapet and said there would not be plenty of gas to go around and at an affordable price. They generally believed the reports about the manufacturing approach to hydraulic fracturing; the benefits from better placing of the well pads; and the technological advances in directional drilling. They had seen the reserves figures and could see the rig count figures.

So while the market accepted that the US would lose some of its price advantage by sharing cheap gas globally, industry and other manufacturers at home always had the advantage of the low well-head price, while the benefit to the economy as a whole from exports would be substantial. And the petrochemical industry is doubling down on its competitive advantage, investing heavily in plant to monetise the liquids and gas.

This relaxed approach appears to have been vindicated so far. As more liquefaction capacity comes on stream, the gas oversupply is felt just as keenly at home as it is abroad. US wholesale prices are in the low $2/mn Btu even though gas is flowing into storage – and into Mexico and into liquefaction facilities -- at unusually high rates.

Since mid-October, US gas storage inventories in the Lower 48 have exceeded the five-year average for the first time in just over two years, according to the Energy Information Administration. There were 3,519 trillion ft³ for the week of October 11, the first week that that had been the case since September 22, 2017. The following week that had risen to 3.606 trillion ft³, or 28bn ft³ more than the five-year average as of October 18. Further, weekly injections have surpassed the five-year average for the past 10 weeks in a row, exceeding typical weekly injections by about a fifth. Continued strength in natural gas production could result in continued growth in the surplus to the five-year average in coming weeks, the EIA says.

The story has also been largely free of scandals: the health and safety concerns have not been justified, despite concerns over a cowboy approach to regulations. There have been very few public recollections of the very popular but fatally flawed film Gasland, and few cries of “I told you so.” The attention is not on hydraulic fracturing but on other commonplace consequences of sloppy or penny-pinching mass-production. In the gas output industry that means methane leaks and, worse, flaring of associated gas in places inconveniently remote from pipelines.

Properly managed, these need not become an existential threat to production in the same way that minuscule tremors have become in the UK. There, the government is frightened of both allowing and banning fracking. The science says yes but some public opinion says no. While in the Netherlands the Groningen gas field operator NAM has to stop production at a Richter magnitude as high as 3, in the UK, Cuadrilla has downed tools since its August tremor of 2.9 pending a regulatory investigation.

The outlook for the US in the coming years is also encouraging. Speaking at the Oil & Money conference in London October 8, the chair of the Driftwood LNG project operator Tellurian, Charif Souki, almost said it was a patriotic duty for Americans to keep liquefying and exporting gas, as that was the only way to capitalise fully on the equally vast reserves of tight oil in the Permian. His eye is on 200mn mt/yr for the US as a whole, by the time the Permian basin is in full swing and accounting for half of that.

And self-sufficiency in oil and gas also brings the ability to influence global markets: this is especially important, given the decline of output in a number of Opec member states and growing demand for energy, especially in China and India. Like it or not, the US can also use rhetoric about LNG to wield soft power in eastern Europe, where freedom from Russian gas is cheap at almost any price.   

Put in that light, it is hard to imagine that the finance institutions, banks, buyers and producers will fail to find a solution to the finance problem for much longer. It is more a question of producers learning to live with a utility rate of return in order to allow their increasingly “ornery” commodity to reach as many consumers as possible.

This also fits well with the mood music: the oil and gas industry must become a lot more like any other, if it is to continue to operate at its best, be answerable to public scrutiny and so on.

More LNG plant operators must also consider committing their own money first to lift a project off the ground, and then refinance it at a later date when or if the lenders become less conservative. They are not owed a living. They must also hammer down all the costs and develop better marketing operations to ensure growing demand, and not just for power generation. Gas for road vehicles is a key part of this expansion, as is marine bunkering – one that was made easier to penetrate by a regulation beyond the gas industry’s control. Transparency in freight is another thing that can bring improvements to the market. Price discovery is the surest route to the efficient allocation of finite resources -- financial or molecular.