Energy Analytics Trading and Risk

Natural gas supply purgatory: Is LNG the beacon of hope?

byEnverus

This blog is based on a segment of CBC’s “Business Report, Calgary Eyeopener with Loren,” featuring Enverus Intelligence® Research’s (EIR)* very own Al Salazar. Listen to the full segment here.

The natural gas industry is facing many challenges lately. Prices are trending towards historically low levels, and this economic instability has attracted attention. Especially, the consequences of this decline have sparked discussions among industry experts on its causes, effects and prospects.

Current trends and their impact

Natural gas prices have plummeted – a bleak situation for the energy sector. This decline is driven by very warm temperatures and a late 2023 L-48 production surge that has created an untenable supply glut, a term that EIR’s Al Salazar has fittingly called a “supply purgatory.” It’s a strange place to be in. At one point, winter gas prices were cheaper than summer. Quite the anomaly indeed. Furthermore, this supply abundance still exists despite a perfect bullish January storm, where significant supply shut-ins coupled with gas-fired generation load that came close to rivalling summer peaks. In the end, it’s just too much supply with nowhere to go.

Producers will suffer from these extremely low prices. Even the biggest players in the market, such as Chesapeake, must reduce their production levels significantly. On the other hand, for most consumers, the falling prices do not motivate additional consumption as their needs arebased on weather, not price. This results in response lags between consumers and producer behavior, with storage serving as the market shock absorber– and it, too, is signalling extreme surplus.

It is remarkable that under these conditions, some regions, such as Alberta, have a slight edge in these difficult times. Alberta’s natural gas producers have a world class resource in the Montney where supply costs are very competitive, while the resource is “liquids-rich” providing an additional revenue stream. This offers some insulation against low natural gas price pressures.

However, logistical constraints and high storage levels in the U.S., create serious headwinds for Alberta supply seeking a reprieve.

The road ahead

Despite the gloomy outlook for the near future, there’s a possibility of recovery with the anticipated progress of liquid natural gas (LNG) projects. This opportunity could greatly change the situation in the market, offering some respite. In fact, Al Salazar’s team predicts that:

“…gas prices will reach $5.00/MMBtu in 2025-26. Significant gas growth is needed to fill LNG export capacity additions and meet existing demand. Half of the growth will be filled with Gulf Coast dry gas requiring a 12% CAGR for the Haynesville over this period. Furthermore, sustained $5.00/MMbtu should be adequate for producers to achieve this growth rate while maintaining a 50% reinvestment rate.” (Enverus Intelligence Research, 11/02/2024)

At the moment, the industry seems to be frozen in a dilemma, struggling with urgent issues but also optimistic about the potential benefits that could result from the growth of LNG. The industry is facing extraordinary difficulties and needs to make crucial decisions. As usual, we will have to be patient and watch what happens as timing is everything.

Enverus Intelligence Research, Inc., a subsidiary of Enverus, provides the Enverus Intelligence® | Research (EIR) products. See additional disclosures.

Authors:

al-salazar
Al Salazar – EIR Contributor*

Al Salazar is a seasoned member of the Enverus Intelligence team, bringing over 23 years of experience in the energy industry with a focus on fundamental analysis of oil, natural gas, and power. Throughout his career, Al has held key positions at EnCana/Cenovus and Suncor, where he honed his skills in forecasting, hedging, and corporate strategy. Al’s 15-year tenure at EnCana/Cenovus was particularly impactful, where he contributed significantly to the company’s success. AL earned his bachelor’s degree in Applied Energy Economics from the University of Calgary in 2000, followed by an MBA with honors from Syracuse University in 2007. Al’s academic background, coupled with his extensive professional experience, has equipped him with a deep understanding of the energy industry’s complexities and the necessary skills to navigate them effectively.

Chris leads the development and communication of the value these products provide various industries, including oilfield services, investment funds, wealth management departments, banks, E&P oil and gas departments, and midstream operators. Chris helps provide customers across the energy ecosystem with the intelligent connections and actionable insights that allow them to uncover new opportunities and thrive. 

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