Gas Barons are Worried, and They Should Be

October 10, 2019

Above, new ad campaign from American Petroleum Institute.

Desmogblog:

Fracking has produced so much natural gas in the U.S. that prices are at historically low levels due to the “glut” of natural gas — something a recent article in Natural Gas Intelligence predicted could last another five years. Lingering low gas prices could mean that in 2020 global buyers of liquefied natural gas (LNG), a major growth area for the industry, “could start rejecting U.S. cargoes.”

A recent analysis by the Institute for Energy Economics and Financial Analysis colorfully summarized what the glut and predicted low prices into the 2020s meant to the gas industry.

…heads must be exploding in the board rooms of oil and gas producers throughout the U.S. and Canada,” wrote authors Tom Sanzillo and Kathy Kipple.

While environmental advocates certainly “demonized” coal due to its contributions to climate and other air pollution, the main reason coal use in the U.S. has declined is that it is too expensive to compete with cheaper natural gas and renewables — much like nuclear power. And now the same dynamic is happening to natural gas, even with historically low prices driven by an oversupplied market.

As we have noted before on DeSmog, natural gas prices can only go up from here, while renewable energy and storage prices just keep falling.

The economics of the U.S. coal industry have led to several major bankruptcies in 2019 — something echoed by the fracking firms producing a glut of natural gas but a shortage of profits (which DeSmog has been investigating for more than a year).

Scott Forbes, a vice president with leading energy industry analyst Wood Mackenzie, gave a similarly bleak assessment for the fracking industry:

“I talk to those guys, all the fracking companies, on a daily basis. I’m very engaged in what they are doing with their business, and I completely believe that the current model is unsustainable.”

Natural Gas Intel:

Countries across the globe are enacting more stringent regulations to reduce carbon emissions and the gas industry has to do a better job of policing itself, he said.

“As we sit around our boardroom, we think about cataclysmic events,” driven by weather events in developed countries, such as the heat wave this summer in Europe or U.S. hurricanes.

“Cataclysmic weather events that are climate linked will start to change regulators’ minds once and for all,” Coleman told the audience.

“I think everybody realizes what we’re trying to do here to get to a lower carbon world, which is an expensive mix.” And “regulators can spend lots of money when it comes to getting votes.”

To that end, he advised operators to “be careful to meet promises,” as “there’s a lot of rhetoric” by companies that are eyeing zero-net carbon status by 2050. The messages are “all aspirational,” but people are watching.

Desmog again:

Much like coal, the economics of natural gas production in the U.S. and Canada are unsustainable, and the writing is on the wall for all those willing to read it.

The city of Medicine Hat in fossil fuel–rich Alberta, Canada, has been producing natural gas for more than 100 years — earning it the nickname “Gas City.” However, Medicine Hat is going to need a new nickname.

After losing money on it for the past several years, the Gas City has announced that it is getting out of the gas business. Brad Maynes, the city’s commissioner of energy and utilities, explained the decision to the Calgary Herald, “We could just not see ourselves returning to profitability.”

The U.S. fracking industry hasn’t been profitable for the past decade, investors are understandably losing faith in the industry’s broken promises, and the industry is facing a major debt crisis. As Scott Forbes pointed out: This simply isn’t sustainable.

Renewables Beat Coal and Will Eventually Beat Natural Gas Too

The oil and gas industry is betting big on natural gas and continues to push the idea that it is a climate solution while launching a slick new ad campaign. That’s even as the CEOs of Chevron and Equinor admitted during UN Climate Week that methane leaks and burning related to fracking are a serious issue that the industry won’t be able to hide for long.

And while it makes sense for the industry to try to lock in its product for the long-term, natural gas — like coal and nuclear — simply won’t be able to compete with the rapidly falling prices of renewable energy and storage in the future.

Two reports released this month by the Rocky Mountain Institute (RMI) concluded that many of the natural gas power plants and pipelines currently being built will end up as failed investments and stranded assets.

Oilprice.com:

Appalachian shale drillers are getting squeezed by low prices, and a supply glut may mean that there is little prospect of a pricing rebound anytime soon.

Earlier this month, IHS Markit put out a press release entitled, “U.S. Natural Gas Price Will Fall to Levels Not Seen Since 1970s.” The firm said that persistent oversupply from the Marcellus would be “reinforced” by a surge in associated gas production from the Permian basin. That could keep average natural gas prices below $2/MMBtu next year, which would nominally be the lowest since 1995, but in real terms it would be the lowest since the 1970s.

The market is set to see falling prices despite structural increases in demand from new gas-fired power plants and LNG export facilities. IHS noted that U.S. demand has climbed by 14 billion cubic feet per day (Bcf/d) in annual consumption since 2017, but supply has expanded by even more than that amount since the start of 2018.

“It is simply too much too fast,” Sam Andrus, executive director of IHS Markit, said in a statement. “Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”

The bust in gas prices create significant dangers for gas-focused shale companies. “With the news from IHS Markit that natural gas prices in the United States will drop below $2 MMBtu in 2020 and remain low through at least 2024, if not longer, heads must be exploding in the board rooms of oil and gas producers throughout the U.S. and Canada,” Tom Sanzillo and Kathy Kipple wrote in a commentary for the Institute for Energy Economics and Financial Analysis (IEEFA).

BTW, I have met the above mentioned Tom Sanzillo – he is former Deputy Comptroller of the State of New York, so has serious financial analysis chops. He was spot on a decade ago in pointing out the emerging weakness in the coal industy.

IEEFA.org:

  • The mantra that more pipelines will rationalize the market has been upended. This view from the oil and gas industry never made sense. As IHS Markit makes clear, new pipeline capacity contributes to an oversupply of natural gas forcing down prices and profits.
  • Smaller exploration and production companies, already suffering, are likely to continue to fail. Recent, modest improvements in cash flows are insufficient to rescue these companies, which represent roughly 30 percent of production.
  • Expect significant reductions in new capex. The oil and gas sector is besieged with bankruptcies, and has trimmed capex budgets. Production is stagnating.
  • The oil and gas equipment and supply sector will worsen. The sector’s financial performance already trails the oil and gas sector. Expect more bad stock performance from Halliburton, Schlumberger and Baker Hughes.
  • U.S. producers’ plans to cash in on export markets must be reconsidered, according to IHS Markit. The global market remains oversupplied, with limited profit potential on the export side. Increased exports from the U.S. will deepen the oversupply.
  • Integrated oil and gas companies will not succeed, either. The prevailing wisdom is that larger oil giants that eat the smaller, failing producers in the fracking space will succeed where smaller, nimbler players have failed. This will prove false. Expect growing restlessness by once-sleepy investors as bullish spending by ExxonMobil in the Permian Basin continues to run up against the reality of tepid earnings in its U.S. upstream operations. Five more years of capex spending and low profits in the Permian will expose this investment fallacy. A period of low oil prices and increasing competition in the petrochemical sector will further erode the company’s investment rationale that downstream earnings benefit from low oil prices.
  • Canadian investors be forewarned. IHS Markit suggests  investors are expecting rapid growth of natural gas production and attendant drilling, pipeline capacity and ports. But increased Canadian production will face an oversupplied market in the U.S. and weak prices.  Canadian plans to expand its natural gas production have not seriously considered the price changes in the market created by U.S. frackers.
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3 Responses to “Gas Barons are Worried, and They Should Be”

  1. dumboldguy Says:

    “Five more years for NG to die” seems to be the mantra of the day. Can we afford that much time?

  2. Keith McClary Says:

    Another desmog blog article suggests that the glut may not last:

    “James West, a managing director at Investment bank Evercore ISI, assessed the situation for the Wall Street Journal. ‘We’re getting closer to peak production and we are reaching the peak of the general physics of these wells’, he said.

    Perhaps the most important fact in the Wall Street Journal’s recent story was only mentioned once: ‘sweet spots [are] running out sooner than anticipated.’ ”

    https://www.desmogblog.com/2019/10/03/fracking-revolution-peak-without-profits

    • jimbills Says:

      I was a peak oil guy somewheres in the 2007 to 2012 range. Every bit of data I could find strongly suggested oil production would peak. Multiple sources argued persuasively that it would happen. And conventional oil production did peak, it’s just that fracking developed far more effectively than even the oil optimists expected, and now we’re in our current ‘glut’. The same with NG – conventional gas peaked over a decade ago, but fracking has allowed its current output.

      Since then, I treat every prediction with more than a little skepticism. We don’t know what technology will come into the picture or exactly how the economics will play out. If I had to guess, the fracking boom is a temporary event, but who knows how long it will last.

      I saw this article today:
      https://www.theguardian.com/environment/2019/oct/09/northern-australia-fossil-fuel-climate-goals-paris-agreement

      “In the Northern Territory, the lifting of a moratorium on fracking, after pressure from Scott Morrison’s Coalition federal government and industry lobbying to increase gas supply, has opened up exploration in the Beetaloo sub-basin. The resources minister, Matthew Canavan, says it could supply domestic and international customers for more than 200 years.”


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