The natural-gas and oil price run-up since hurricanes Katrina and Rita has subsided somewhat following a warmer than usual winter, record natural-gas storage levels, and successful conservation...
The New Gas Wisdom
Unconventional gas sources put a ceiling on future prices.
factors, such as global commodity prices, engineering, procurement and construction (EPC) prices and availability, and the value of the dollar. Regardless, it’s likely that LNG indeed will matter for the U.S. gas market at this point, either as a participant or as a potential entrant, setting a price ceiling. At the extreme, should U.S. unconventional supplies really prove to be available at the levels and low incremental production costs suggested by some recent analyses, then conditions may exist for investment in U.S. gas exports at some point in the next decade. While this may sound fanciful today, the point is that even in this scenario, U.S. gas prices could be linked to global prices, though in this case at export rather than import parity. And this linkage is likely even without an actual molecule of natural gas ever being shipped to (or from) U.S. shores.
Bringing the various threads of this story together, we arrive back approximately where we started. That is, with a view that in the medium term, LNG imports are likely to play the pivotal role in determining U.S. natural gas supplies and prices. Corollaries to this view include a linkage of U.S. gas prices to those of the rest of the world (though not necessarily those of oil), and the likelihood of the United States serving as the swing consumer and storage depot for the global LNG market. The changes to the U.S. midstream sketched above once again would require attention, including reconfiguring pipelines, storage, and processing capacity to accommodate altered product flows and specifications. However, much is different about this emerging view of the future of the gas market. The equilibrium price of gas implied by this perspective is probably higher than the ~$4.00/MMBtu levels predicted a few years back, thanks to increases in liquefaction construction costs, but is well beneath the current levels of LNG prices. And this convergence would occur several years after earlier predictions had anticipated, perhaps not until well into the next decade rather than in 2009 or so as previously envisaged. Above all, the potential impact of unconventional gas production on the U.S. could be immense, both for the U.S. gas sector—including sweeping implications for the midstream to support new unconventional supplies—but also for the U.S. power sector, carbon policy, and the global natural gas industry.
As is obvious from the scenario sketched above, we believe analysts of the U.S. gas market have fallen victim to the inherent rigidities in the market. Supply in this market tends to over- and undershoot demand, thanks to lags in major capital projects and predictable biases in planner’s forecasts ( i.e., placing excessive weight on recent experience). As a result, taking bets on some view of the correct fundamental equilibrium price of natural gas appears risky. Instead, the question revolves more around getting the timing of different developments right, rather than predicting the right price. More practically, our perspective points to several nearer-term imperatives for participants in the gas and power market.
Many analysts have characterized the availability of LNG imports as a