The boom in natural gas exports is driving massive demand for US production and linking US prices to the rest of the world.
By Wolf Richter for WOLF STREET.
Natural gas futures spiked to $9.40 per million Btu earlier in the day, the highest since Dirty Young was, well, since the massive double spikes between 2005 and 2008. In afternoon trading, the price fell again to around $9, after tripling. from a year ago, when it was $2.98, and more than tripled from the $2-3 that dominated from 2011 to the spring of 2021.
Natural gas prices can spike and fall, periodically wiping out hedge funds caught on the wrong side. But this time it’s different; this time there are large-scale structural changes in the US natural gas market that have been years in the making: Natural gas exports boom as LNG has connected with demand and prices in the rest of the world.
And the fracking boom that caused prices in the US to collapse from 2009 while prices rose elsewhere is now being used to export LNG, and we’ve already said goodbye to those collapsed natural gas prices of $2-3 per million Btu. .
The fracking boom that took off in earnest 15 years ago made the US the world’s largest producer of natural gas. Before the boom, the US was a major net importer of natural gas (via LNG globally and via pipeline from Canada), and prices were affected by global prices and supply constraints in the US.
The production of the fracking boom caused so much supply in the US in 2009 that the price collapsed. Between 2003 and 2021, natural gas sales almost doubled. Note the production peak in 2018 and 2019:
This surge in US production triggered a series of events: major natural gas producers, such as fracking pioneer Chesapeake, filed for bankruptcy; electricity production massively switched from coal to natural gas, causing miners to file for bankruptcy; and major industries sprang up in the US around cheap natural gas, including fertilizer manufacturers that use natural gas as a feedstock.
And from 2016, more and more LNG export terminals were built to arbitrate the cost difference between US natural gas and global LNG pricing; and pipeline capacity was added to export more natural gas from US production areas near the border with Mexico.
The export of natural gas via pipelines to Mexico has grown steadily (green line). But LNG exports have exploded (purple line), starting from almost nothing in 2016 to more than 3.5 trillion cubic feet in 2021. And total exports reached 6.7 trillion cubic feet in 2021, about 18% of the US marketed production:
LNG exports require highly capital-intensive liquefaction facilities connected to production areas by pipeline. Export capacity increased from less than 1 billion cubic feet per day (Bcf/d) in 2015 to about 12 Bcf/d by the end of 2021. More large-scale LNG export facilities are under construction and more have been approved, and more are in at earlier stages of the process.
As US export capacity continues to grow, global demand for US LNG is increasingly competing with US demand, reinforcing the link between global LNG prices and US natural gas prices.
And those dirt-cheap natural gas prices from 2009 to mid-2021 that benefited consumers, power generators and industrial companies, and that bankrupted many oil and gas producers specializing in natural gas fracking and bankrupt miners, are now a thing of the past. Much higher prices, in line with global prices, are what the US is now dealing with.
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