Natural gas at balance price by fracking natural gas.
The Appalachian region in the US has become El Dorado of natural gas extracted by fracking techniques and explains that the country has positioned itself as the world’s leading producer. Thanks to this historical expansion, the price of natural gas is plummeting for consumers and cornering the use of coal in the domestic sphere. But the industry boom is having its dark side. The production and supply is so overwhelming that the market is flooded.
As was the case with fracking in the Permian Basin, the natural gas industry in the US borders on death for its success. Extraction companies have put so much natural gas on the market that prices have collapsed to the point that continuing their activity leads them into losses. For the first time since 2016, the price of natural gas falls below the level of 2 dollars per million British thermal units (BTU). At these prices, it is not profitable to drill and companies carry high debt to open new wells.
The situation is causing layoffs and amortizations and cuts in millionaire expenses. But efforts are being insufficient to curb the increase in supply. Not only are the Appalachians that turn their production, also the Permian Basin, although its main production is crude. Unfortunately for natural gas producers, the Permian Basin frackers consider natural gas as a byproduct, sometimes annoying for their main production, and they don’t mind selling at a loss.
When a well begins to produce, much less valuable natural gas appears along with the crude. The pipes can capture that gas, but when there are not enough, the producers have to get rid of the gas so as not to stop pumping oil. They only have two options to sell or burn it. This year, in the Permian, local gas prices have become negative several times, which means that drillers were actually paying customers to transport their gas.
Nor is the weather helping. This winter is unusually warm and inventory levels are above its seasonal average. Futures prices show that operators do not expect gas prices to rise above $ 2.6 even in the coldest months, when demand generally peaks.
“The industry is falling victim to its own success,” explains Devin McDermott, an analyst at Morgan Stanley at Bloomberg. “There is not only an excess supply in the US, but also in Europe, in Asia and around the world,” he emphasizes.
According to McDermott, US producers need the gas to be at least $ 2.50 to generate free cash flow. “In the short term, we don’t think it’s realistic to see a similar price,” he says.
The depression of prices is reflected in the balance sheet of many companies. Chesapeake Energy, one of the most profitable companies among American frackers, is no longer and struggles to return $ 9 billion of debt. In November he warned the market that it will go bankrupt. EQT Corp, the largest national gas producer, recognized an impact of $ 1.8 billion, partly due to low prices.
Even the oil giants are not immune. Chevron announced $ 11 billion in provisions, more than half of that attributable to the depreciation of Appalachian gas assets. For their part, producers such as Cabot Oil & Gas and Range Resources are responding with investment cuts, like almost the entire sector.
However, the reductions in investment will hardly have an impact on production levels in the US. The International Energy Agency forecasts that it will continue to set records by increasing 3% in 2020 to 95,000 million cubic feet.
Despite being promoted as a greener bridge fuel that allows utility companies to reduce their emissions on the road to a carbon-free future, gas is under attack in some parts of the United States by lawmakers seeking to ban all fossil fuels.
One way out of excess supply in the US has been the nascent liquefied natural gas (LNG) export sector of the United States. Since the first shipment of LNG fuel, the country has jumped into the front rows of global suppliers. However, the trade war has stopped expectations dry.
China has imposed tariffs on US LNG, effectively cutting an important market. Despite the commercial agreement of the first phase of last week, in which China agreed to buy an additional $ 52.4 billion of US energy products, including LNG, it is unclear whether the tariffs will be eliminated. Meanwhile, international LNG prices have plummeted, and there are doubts about whether the global market can take to absorb available supply.
“We just don’t believe we can sustain the reduction of LNG exports later this summer,” says Clifton White, a commodities strategist for Bank of America. “That would force the market to set prices low enough to find a growing demand in the domestic electricity sector.”
All this pain will surely be reflected in the production numbers at some point. The Atomic Energy Agency forecasts that the production of natural gas in the US will decrease by 600 million cubic feet next year, the first annual decline since 2016, as low prices will finally stop drilling in the Appalachians. This, combined with the possible elimination of tariffs, could finally provide the kind of positive catalyst that American producers are desperately looking for.
“Many US LNG exporters probably expect, if they don’t pray, that China will import more US gas following the first phase trade agreement,” says Rich Redash, a gas analyst at S&P Global Platts.
Meanwhile, some investors are willing to look beyond the current challenges. Dallas Cowboys owner Jerry Jones has been looking for more gas assets in the United States. Two of the largest businesses in the industry in the past year have been acquired by foreign operators, Japan’s Osaka Gas and Thai Banpu.
These agreements offer hope on the horizon awaiting strong global demand for gas, in much of Asia. The US would be the great winner in the long term. Still, Banpu does not plan to drill its new reserves at Barnett Shale in North Texas until gas prices rise to around $ 3.5.
“I’m pretty sure that in five years, that will happen,” said Chris Kalnin, CEO of BKV Oil & Gas Capital Partners, the investment vehicle for Banpu, in an interview last month.