Almost without notice, the US natural gas price has soared to its highest level in 18 months. Suddenly all that talk about America’s low cost energy future is starting to look a little more expensive. Is America’s much vaunted energy revolution fading before it has even matured?
The so-called Henry Hub gas price (the key price indicator for US natural gas spot and futures prices) ended last week at $US4.125 a Mbtus (million British Thermal Units) last week, the highest since September 2011 and more than double the 10 year low of $US1.92 Mbtus in April of last year. That was a rise of 2.6% in the week (when US oil futures shed 5%) and more than 25% so far in 2013.
In fact US natural gas prices are up more than 113% since last April when they hit a 10 year low of $US1.90. The surge has been happening month after month, and analysts have put it down to a variety of factors, none of which they claimed were significant. Now the $US4 level has been breached, they are taking notice.
According to the boosters of America’s current energy boom, such an exaggerated price spike wasn’t supposed to happen. Even some foreign analysts and media who have predicted a surge in US gas exports in coming years failed to spot this one. Remember how the stories claimed the flood of new US LNG projects would threaten Australia’s huge projects in Queensland, WA and the Northern Territory? Prices above $US4 a Mbtus and fears rising cost worries among producers will force a rethink on some of the 19 LNG projects vying for US government export approval.
Analysts are blaming the rise on a variety of reasons: a looming shortage (yes shortage) of gas because many companies switched from gas to oil and liquids productions in the new producing areas as gas prices fell to a low in early 2012.
That led to a jump in oil production from places like North Dakota and parts of Texas and Arkansas (BHP Billiton is just one of those companies which switched to concentrating on the production of liquids and oil and reduced their production of gas). But the demand for gas was boosted by the very cold winter late last year and early Spring this year in the US, with stocks being run down. As result stocks of gas are very low ahead of the usual Spring restocking.
A year ago, gas stocks were already being rebuilt as prices plunged to their 10 year lows. But then as 2012 went on the higher demand from power companies and consumers came at the same time as US economic activity picked up, which in turn started pushing prices higher.
As gas prices have risen this year, so have the number of announcements by producers that they are switching their production concentration back to gas and away from liquids. Despite the threat of higher production, gas prices have continued to rise are are now back to levels where coal is back being competitive for power generation.
Some US analysts are saying that the switch to gas by the power industry will slow or come to a halt for the time being if prices persist at these levels. They say however that demand for gas will taper off as the US Spring takes hold, pushing prices down under $US4 a MBTU. But offsetting that view is the news that gas production from some of the key shale areas, such as in Texas, Louisiana and Arkansas (the Haynesville shales) is falling because companies have already tapped the best areas. More, closer infill drilling will be needed to maintain production from many of these ‘tight’ fields, leading to rising production costs, which will need higher prices in coming years.
Goldman Sachs last week forecast prices could average $US4.50 Mbtus in the second half of 2013 – they haven’t traded consistently at that level since early 2010. Goldman says short term production will have to rise to "balance the market after summer", meaning that unless gas supplies rise, prices could spike higher and remain there ahead of the next northern Winter.
But will producers, such as BHP, try and boost production to take advantage of a relative shortage, or will they continue at current levels and sell all the gas they can produce at the moment and make more money than they have made in the past 18 months?
It’s for that and other reasons that some analysts say prices are current levels (and higher at times) will be the new norm and not prices of $US3 or less simply because demand has picked up. As well the longer gas prices rise or continue at these levels, the more attractive it becomes to ship to domestic customers and not try and win approval for export LNG projects. In fact higher gas prices could force the US Government to reject many if not all of the 19 export project requests as fears of higher prices increase.
There’s a rising tide of support from US business, environmentalists and consumer groups for a domestic gas reservation system in the US. Many oddly believe that the more gas exports are restrained or banned, the less the chance of a surge in US gas prices to export market levels (In Asia they are around $US16 MTBUs for LNG shipped into Japan at the moment).
America’s fracking boom has boosted output of both oil and natural gas in the past five years, allowing the country to dream of again re-inventing itself as a haven of low cost energy in a world where global warming and other menaces threaten to overwhelm its rivals (try China) and economic malaise cripples others (Japan and Europe). Oil imports fell sharply in February from January and a year earlier, despite a $US2 rise in the average price for barrel.
And rising production of both has changed the US industrial and economic outlook, helping cut imports, increase employment and bring rising incomes to wide areas of the US Midwest and other states. As always there’s a downside, with increased concerns about the environmental costs associated with tracking and tight oil and gas production techniques. But offsetting these have been the definite impact on carbon emissions as less coal has been used in US power stations, particularly in the last 18 months.
In 2012, coal generated 37% of US electricity, down from 42% in 2011 while the share held by gas rose to 30% per cent from 25% (and topped or equaled coal’s share in a couple of quarters in 2012). The US Energy Information Administration estimates carbon dioxide emissions from fossil fuels fell by 3.9% in 2012, mostly due to the fall in coal consumption by the power industry. US power companies say they are cutting their gas purchases because of the higher prices.
And there is an undoubted domestic boom going on in manufacturing. In December, economists with UBS bank said some $US65 billion in announced construction of new plants related to cheaper natural gas, and said another 11 projects had been announced worth billions of dollars more. These projects will be using gas as either a feedstock or to provide energy instead of electricity or coal.
To many Americans, the gas and oil tracking boom holds out the dream of a return to the golden years in the 1950’s and 60’s when thanks to cheap oil (not much gas) America was a low cost energy nirvana. That dream will remain just that – the country and the world are vastly different now compared with 50 years or more ago.
