North American Gas is Going Global
Episode Summary
Natural gas price has been climbing to near-record highs in North America. This week, Jackie and Peter talk about the reasons for high natural gas prices now.
Longer-term, North American gas markets are undergoing a structural change. To reduce their reliance on Russia, EU countries are turning towards new gas suppliers including the United States. Consequently, a US build-out of LNG export capacity is starting. The pull from more Canadian and US gas going overseas will change the gas markets.
Peter and Jackie finish the podcast talking about the history of natural gas which has undergone many transitions. It started with coal gas and transitioned to nature or natural gas. The United Kingdom was once importing gas from the United States, then Europe grew domestic supply and imported more Russian production. Now the EU is transitioning away from Russia. In the future, gaseous fuels are likely to transition towards clean hydrogen and Renewable Natural Gas (RNG).
Wait, it’s Spring. We don’t normally see such high prices for natural gas in the Spring. Oh sure the retail price at the pump has been high but that other gas – natural gas – there are some things happening behind the scenes putting upward pressure on those prices.
“The price at Henry Hub is up from about $4 at the start of the year to near $8 now. Depending on the day, it’s a bit over eight and under,” notes Jackie Forrest.
“And the larger dynamic is that with the war in Europe and Ukraine the international gas price is really high for liquified natural gas,” continues Peter Tertzakian. “And so, while we hear news about the war, we hear news about oil prices and so on, what’s gone under the radar is a couple of deals that were done by Canadian companies, notably ARC Resources and Tourmaline. They’ve been announcing deals with American LNG exporters because right now, we don’t have an LNG export terminal. We won’t have one until 2025 with LNG Canada out in Kitimat. So, actually, the producers here are saying, ‘Well, I want to capture these higher prices in the United States and beyond in international markets.’”
Deals are being done as the European desire to get off Russian oil and gas grows. That’s leading to more pull on North American natural gas. That sounds great but right now only about 10 per cent of North America’s natural gas is being exported and we’re limited by the availability of facilities that need to be built.
“I think the Americans may surprise us. I think over the next five years, we’re going to see quite a bit more LNG, but today, we’re limited to about 11 or 12 Bcf per day when those parts are full out,” says Jackie.
“I want to just follow up on this dynamic because I don’t think a lot of people are aware of it. Because of the Ukraine situation, we are sending as much as possible out through Gulf Coast LNG export terminals. Typically, at this time of year, those terminals would not be working full out. And as a consequence, we’re sending so much to Europe because they need it to offset Russian gas, we’re not filling our storage for winter as much,” says Peter.
At the same time storage levels for natural gas in Western Canada right now are exceptionally low.
In this episode, Peter and Jackie talk about whether these changes are just temporary or possibly a structural change. Is North American natural gas hitting the world stage? What does all this mean for natural gas prices next winter? And in Alberta, so much of our electricity is generated by natural gas, what does this mean for electricity prices?
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Episode 156 Transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. And welcome back. Well, if you’ve been to the gas pump, you know that gasoline prices have been high, although I think we’re somewhat getting used to it as the retail prices have adjusted to $100 a barrel oil. But behind the scenes, the other gas, natural gas, has really risen in price. Right? I mean, it’s just… And I don’t think that that’s been fully acknowledged or talked about because, well, we’re solidly into spring here, coming into summer. And that’s not when consumers see those prices. Right, Jackie?
Jackie Forrest:
Yeah, yeah. The price at Henry Hub is up from about $4 at the start of the year to near $8 now. Depending on the day, it’s a bit over eight and under.
Peter Tertzakian:
And the larger dynamic is that, of course, with the war in Europe and Ukraine, the international gas price is really high for liquified natural gas. And so, while we hear news about the war, we hear news about oil prices and so on, what’s gone under the radar is a couple of deals that were done by Canadian companies, notably ARC Resources and Tourmaline. They’ve been announcing deals with American LNG exporters because right now, we don’t have an LNG export terminal. We won’t have one until 2025 with LNG Canada out in Kitimat. So, actually, the producers here are saying, “Well, I want to capture these higher prices in the United States and beyond in international markets.” And so, they’re signing up with US exporters. Right?
Jackie Forrest:
Yeah. They’re going to supply their gas, send it through the pipeline system in North America and get them onto those LNG tankers out of the Gulf Coast. So, that’s a major change here that Canadian producers are accessing world markets and can access world markets through this very large infrastructure we have that gets us down to the Gulf Coast.
Jackie Forrest:
And there’s been some other news that’s gone under the radar that I find quite interesting. May 2nd, there was an announcement that a developer in the US who has a proposed LNG project called NextDecade made long-term supply agreements to customers in Europe and Asia. In Europe, it was a French utility. In Asia, it was a Singapore trading house. But this is interesting because the US has a whole bunch of projects just sitting there waiting for long-term contracts. And once they have that, they can move. They can start their final investment decision and start constructing.
Jackie Forrest:
And I find this interesting because, for a long time, Europeans especially avoided these long-term contracts because they were going to transition off gas and they didn’t want to sign it. Sometimes, these contracts can be like 20 years long. They don’t want to commit to taking gas for that long, but you’re seeing a change. And that is going to, I think, cause a big wave of capital projects to move forward here as those buyers sign up to longer term deals.
Peter Tertzakian:
So, let’s explore that for a minute. What you’re saying is that, look, a chicken and egg thing here, that the companies like Cheniere and others, LNG Canada, won’t build LNG facilities, liquified natural gas facilities, for export until they’re confident that there are long-term supply contracts signed. In other words, buyers agree to buy gas for 20 years at some notional price or contracted price, which may or may not be, say, for example, linked to the price of oil.
Jackie Forrest:
Yeah, exactly. And companies like Shell may not need that because they have massive balance sheets, but these smaller project developers, they need that because it’d be very difficult for them to get financing to build these projects, if they can’t show there’s a buyer when this is a 20-year life asset. So, you have to show there’s a buyer for a long time. And so, I think it is really going to enable a lot of these projects that aren’t backed by the big companies to move forward.
Peter Tertzakian:
We don’t have any visibility onto the pricing mechanism or the prices these long-term contracts are getting, do we?
Jackie Forrest:
No, but a lot of these ones that are done by the independent developers are some fixed, based off Henry Hub, and then there’s some change, and you cover for liquefaction and other things. So, they’re usually based off Henry Hub price with some additional costs, but they’re not always transparent or public.
Peter Tertzakian:
Well, that’s overly simplistic. But nevertheless, gives a sense of what is happening out there as a consequence of the Ukraine situation and the sanctioning of Russian oil and gas, and the European desire to get off of it completely. So, they have to find other sources. So, deals are being done and that is leading to more pull on North American natural gas. Now, you can only pull so hard because only a small fraction, about 10% of North America’s natural gas, is actually being exported. We’re limited by those facilities. They need to be built.
Jackie Forrest:
Exactly. I think the Americans may surprise us. I think over the next five years, we’re going to see quite a bit more LNG, but today, we’re limited to about 11 or 12 Bcf per day when those parts are full out. And just talk a little bit about the current gas prices.
Peter Tertzakian:
Yeah, let’s do that.
Jackie Forrest:
The situation today is that the North American market is pretty tight already. And typically, in the summer, we would see those LNG terminals not be fully utilized because there isn’t as much demand for gas around the world. And we would use that time to fill up our storage tanks here in North America and be prepared for the winter. But what’s happening now is that because those LNG terminals are full out, the market is pretty tight and therefore, we’re getting prices that are kind of more… They’re not equal to international prices, but they’re getting pulled up by international prices because we have that pull of gas leaving. And as that grows over the next five or six years, we get more and more gas going out, I think that’s going to continue to cause North American prices to be a bit higher.
Jackie Forrest:
I was also going to mention too, like in the near term right now, another factor besides the fact that the gas markets are tight is coal. We still have the ability to generate power with coal in North America, and those coal prices are also moving up. So, that’s another factor that’s creating a floor for North American gas prices to be a bit higher than it would’ve been before, because those coal prices are higher as well.
Peter Tertzakian:
I want to just follow-up on this dynamic because I don’t think a lot of people are aware of it. So, because of the Ukraine situation, we are sending as much as possible out through Gulf Coast LNG export terminals. Typically, at this time of year, those terminals would not be working full out. And as a consequence of the fact that we’re sending so much to Europe because they need it to offset Russian gas, we’re not filling our storage for winter as much.
Jackie Forrest:
Right, yeah. There’s concerns that, by the end of the summer season, when people look at their projections of supply and demand, that we may be low on the storage and that’s helping to elevate the prices. Whenever there’s a view that storage levels will be low, you generally get the higher prices.
Jackie Forrest:
Well, there’s lots of things that can happen this summer. Weather is a big one. There is a lot of predictions that this summer in North America is going to be a hot summer. That’s going to create more demand for natural gas, for power gen, for all those air conditioners. So, if the weather becomes hot-hot, then that’s going to drain down those storage tanks more, assuming we’re still having that LNG go out. So, that’s another variable. And the other one is production, production despite these high prices. We haven’t seen a ton of production growth, but there is an expectation we’re going to get some more production growth. And if that doesn’t happen, of course, that’s going to really cause the markets to even be more tight, so.
Peter Tertzakian:
Yeah. Well, the good news is that it’s been bad news in the past, but the ability to liberate a lot of natural gas with modern drilling techniques is pretty impressive. And so, once the rigs start going out, and my understanding anecdotally and looking at some of the numbers, is that there is more drilling starting to happen in anticipation. But you could see a rise in natural gas production yet again here in North America, but I’m not sure it’s going to be enough to offset this dynamic that is emerging for the fall and winter.
Jackie Forrest:
Yeah. And there is an expectation too, interestingly enough, that there’s going to be a fair amount of growth in gas as a byproduct of the Permian producing oil. So, there is an expectation that’s where a lot of the gas growth may come for the balance of the year. So, we will see.
Jackie Forrest:
Hey, while we’re talking about low storage levels, I do think it’s worth mentioning the very low storage levels in Western Canada right now. It’s really incredible how low our storage is, some of the lowest storage levels we’ve ever had this time of year. And on top of that, we mentioned it on last week’s podcast, but there’s this expansion project of the NGTL. It’s actually called the NGTL 2021 expansion project. Well, here we are in 2022, a year late and we’ve found out that it’s been delayed again.
Peter Tertzakian:
Okay. So, what is NG, let me guess, natural gas TL? What does that stand for?
Jackie Forrest:
Transmission line? Actually, yeah, that’s a good question. Maybe one of our listeners could tell me what it stands for.
Peter Tertzakian:
I don’t know, everything is an alphabet soup now.
Jackie Forrest:
That’s a good point. It’s a regional gas gathering system in Alberta and there was some work being done to expand it. That’s been delayed. And because of this, we think we’re not going to be able to get a lot of gas into storage over the summer, where we typically would. So, there are some concerns about how low these storage levels for gas are in Western Canada.
Jackie Forrest:
First of all, I just want to say, should you be concerned personally, if there’s no gas in the storage tanks in Alberta next winter? We would never run out of gas, just to put it in perspective. Western Canada produces right now around 17 Bcf per day. And on the very coldest days, Alberta uses about eight Bcf per day. So, we will always have enough gas. The difference is we’re going to maybe have to see some very high prices to stop that gas from going out to the US, but we’ll always have gas. It may cause some price spikes, but you don’t have to worry about energy security that way, because I’ve seen some articles written about that.
Peter Tertzakian:
Yeah, we don’t have to worry about energy security. But here’s a great example of what we’ve talked about in prior podcasts, is that this event that’s going on nine time zones away in Ukraine and then in Europe, for the most part, is something that we have not yet felt the effects of. But all of a sudden, the lagged effects and the knock-on effects are starting to manifest themselves. And I think we’re going to feel it this winter with these sorts of higher gas prices that are coming.
Jackie Forrest:
Yeah. With the storage levels we have in Western Canada right now, there’s definitely going to be spikes. I will tell you the 2019 polar vortex year was actually quite similar, although the storage lovers weren’t as low as we’re probably going to have now. And when we did get that cold weather, yeah, we did get more high prices and at times, for a day or two, real, real price spikes. But on average, maybe it was a dollar or two higher than it would’ve been otherwise for a month or something when we had that cold weather, so.
Peter Tertzakian:
Right. I think this all leads to a discussion, well, is this just temporary? It’ll sort itself out. But actually, the answer is, I think, there is a structural change that is happening here because the rush to build more liquified natural gas export facilities in the Gulf of Mexico, we’ll also have LNG Canada hopefully by, say, 2025. So, what that really means is that North American natural gas, which has historically been bottled up within North America, all of a sudden is going to be part of the international gas price, which is a lot higher. So, as we participate more and more in the poll of international gas demand, that means that the prices of North American natural gas, which ultimately gets to the consumer, is going to be higher.
Jackie Forrest:
Yeah. I mean, just to put it in perspective, from 2015 to 2020, the gas price at Henry Hub averaged $2.60 cents. Right? I don’t think that’s going to be the case as we start to see more and more gas go out of North America, especially if the North American market remains tight.
Jackie Forrest:
Remember, in that same period, by the way, like from 2011 to 2020, North American gas, it grew. It almost doubled in its production. And so, we oversupplied the markets. That could happen again, if we saw a huge surge of supply, but I don’t think we are. So, if we continue to have a tight market as we do today, then those North American prices are going to become more linked with the international markets, because it there’s going to be times when that… Just like today, all that gas leaving has consequences to the market here and therefore, it has more influence on prices.
Peter Tertzakian:
Yeah. So, this is going to act really as like a market-induced carbon tax for which there’s no rebate. And that, I think, is going to bring about all sorts of effects in terms of, hopefully, efficiency, conservation and then also switching. Right?
Jackie Forrest:
Yeah. As gas prices go up, people do change their behavior. Right? They conserve. Interestingly enough, that surge of gas supply that we had, from that I just described, right, from when the shale gas was found over the next decade or so, it actually brought a lot of industry to North America because it was cheaper to do things like petrochemicals or fertilizer things here because we had such cheap gas prices. But as that gas price goes up, for sure, you’re not going to see as much growth in that stuff. I don’t know that it grows anywhere else because, honestly, I don’t know that there’s cheaper energy anywhere else anyway.
Peter Tertzakian:
No, there isn’t. There’s nowhere to hide from all of this. I mean, in the past when North American prices have really gone up, like in the first decade of the millennia, say, circa 2003, we definitely had companies pack up their facilities and move, for example, to Chile to produce methanol. And we saw a lot of industry up and down the Mississippi River leave the continent because gas prices were too high. But then what you’re saying is they came back with the shale gas boom, which pounded the prices down and we had that $2 gas for many, many years.
Peter Tertzakian:
Now, as the price of gas internationalizes, is that a word, I don’t know, as it internationalizes and we get higher prices and say, “Okay, well, is industry going to leave again?” And the answer is no, because there’s nowhere to hide.
Jackie Forrest:
Yeah. The gas prices everywhere else are going to be really high. And so, it’s not like, yeah, there’s a place to go.
Jackie Forrest:
Now, let’s talk a little bit about what if North American price was more based on international. Well, first of all, we don’t expect international prices to stay at $30 for MMBtu in the long term. That’s just completely unsustainable, right? Like we’re already seeing European fertilizer plants and things like that shut down because they can’t economically produce at those high gas prices. So, eventually, gas prices, I think, internationally are going to come to a more normalized price.
Jackie Forrest:
If you look back in time, if you think about 2010 to 2014, it was an interesting period because, on the international gas markets, there was some tightness. Prices ranged between $10 and $15. They actually weakened the last five years from that range because we had a bit of an oversupply in the gas markets. But if you assume that international prices do come down back to 10 to 15, which I think they need to do, so that demand remains. At 30, you’re just not going to need as much gas.
Peter Tertzakian:
I do think that there will be more drilling for gas. I mean, I’m already hearing not only here, but even in places like the Middle East. The call for rigs and things is increasing not only to produce more oil for the deficit brought about by the, basically, sanctions against the Russians but also the gas situation, which is even more acute.
Jackie Forrest:
Yeah. And hey, we’re talking about building out LNG here. Don’t think that the Qataris aren’t planning to do that or the Australians as well. Right? So, eventually, we’re going to get back to a more normalized price. It may take several years.
Jackie Forrest:
So, let’s say that the long-term prices, 10 to 15 internationally…
Peter Tertzakian:
Internationally, yeah.
Jackie Forrest:
… which is where it was, if you think about the price to liquefy natural gas from North America and then ship it to Asia or Europe, our view is we’re probably needing… If our price was based on international, we’d be about $6 cheaper because whatever their price is, you have to take away those transportation and liquefaction costs. So, possibly the range of prices, if we’re based on international, would be in the range of $4 to $9, if you take out that transportation.
Peter Tertzakian:
Which when you compare it to other systems is not a bad price. I mean that $4 to $9, we have seen those kinds of prices in the past and can live with it. I mean, I think what was unusual was how low the prices have been over the course of the last five to 10 years.
Jackie Forrest:
Yeah. Like 2.60, that’s really, really cheap gas. Right?
Peter Tertzakian:
At time, it was like a dollar here. It was never a sustainable price.
Jackie Forrest:
Yeah. Now, if you go back pre-shale, we did have prices often in the seven-dollar range, kind of in the middle of that range. I would say I do think probably prices are going to be more on the lower side of that range because as you get higher, you do tend to impact demand. There’s conservation and other things, and maybe more electrification in the long term, if you start to see those higher power prices. Of course, today, power prices are quite dependent on natural gas as well though. But that’s the potential range, if you are linked to that international price long term.
Peter Tertzakian:
Yeah, yeah. Okay.
Jackie Forrest:
Now, there are risks to this. If producers start increasing their production as they did in the shale era, well, that’ll bring the price down again. And we have no shortage of gas in North America. I think there were studies to show we had something like 100 years of gas at the current production.
Jackie Forrest:
Now, a lot of that’s bottled up today because it’s hard to build pipelines in North America and that big engine of supply growth in that Marcellus region, it’s harder to build pipelines out of that region. So, most people think, “Oh, that’s not going to grow very much anymore.” But hey, policies can change. If North American gas prices are very high and it’s deemed to be slowing the economy, things can change. Right? You could have a policy change that enables big pipelines to be built and that supply to grow again. So, I think that’s the one risk to that outlook.
Peter Tertzakian:
Well, all I know, Jackie, is that our jobs are just getting a lot harder. I mean, before, all we really needed to do is, okay, so many rigs are drilling. We know how much gas is going to come on. Here’s what the weather is for the winter, the outlook. So, therefore, this is what demand is likely to be. And you can balance it out. Here’s how much is in storage, and you come up with a price estimate. Now, we have to think about what’s going on in the international situation, including the impacts of the geopolitics of the war and sanctions and so on. We have to think about drilling in other parts of the world. It’s just a lot more complex than it was before.
Jackie Forrest:
Yeah. Well, let’s talk for the last part of this podcast on the past evolutions of the gas market and other things that could happen here as we get the elevated gas prices when it comes to like hydrogen and renewable natural gas. But I thought it might be interesting to go back. Some of the stuff you have on the energy file site talks about this. But let’s talk a little bit about how the gas market got started here in North America, and it wasn’t actually from nature’s gas. It was from coal gasification.
Peter Tertzakian:
Yeah. That’s right, so the gasification of coal. So, basically, in Europe, late 1700s, early 1800s, they decided that you could create gas, methane, CH4. You take coal. You burn it. You heat coal and the heated coal liberates methane. And the methane is called coal gas or others sometimes call it manufactured gas, town gas. And that was captured, put through early pipelines and delivered to homes, largely for lighting. It was a substitute for candles. Then that technology, as it spread through Europe, spread to the East Coast of the United States, even Canada, places like Nova Scotia. It actually made it here to Calgary as well by 1909.
Jackie Forrest:
Really? We had coal gas?
Peter Tertzakian:
We had a coal gasification facility. There’s a great postcard. We’ll put a link to it. It’s in the heritage park collection that shows the coal gasification facility. It was on 10th Avenue.
Jackie Forrest:
Oh, yeah. Maybe we can get you to put that on your Twitter.
Peter Tertzakian:
Yeah. We can put it on. Anyway, I mean, when big quantities of natural gas or nature’s gas, which was found by drilling, was found in here, it was the big well by Bow Island called Old Glory. And we started then to pipe in gas and replace the coal gas with drilled or natural gas, and that was the evolution. And then there was the evolution to transporting gas through liquefaction from the United States to Europe. That happened in 1959. The first LNG tanker was called the Methane Pioneer. There’s all sorts of substitutions.
Jackie Forrest:
It’s really interesting. Like that here we are, exporting LNG today. Right? But that was done in 1959. And prior to this huge shale boom, I mean, North America was thinking they were going to be importing gas from other places in the world. Right? So, what you know is things always change. That it’s this-
Peter Tertzakian:
The gas story is always changing, and you can think of transitions within the gas energy complex because then, of course, the Europeans found North Sea gas and displaced LNG and didn’t need it. Then they needed it as the North Sea started to go into decline and the consumption started to increase. Started to import from the Russians and so, here we are today. So, we have another evolution transition in terms of the trade of gas, but the higher gas prices has also some interesting knock-on effects. It starts to make things like renewable natural gas and arguably, even gases like hydrogen, potentially more competitive.
Jackie Forrest:
Yeah. Especially if you add on the fact that we have potentially a higher gas price, but also carbon taxes in places like Canada, you can actually start to see some of these things start to compete and start to be able to be blended into the existing infrastructure. Because what I really like about those, when you think about those stories, is we went from the coal gas to nature’s gas or natural gas, it really was a very quick change because you could use the existing infrastructure. And when we talk about renewable natural gas or we talk about blending in a certain amount of hydrogen, I know there’s limits to how much hydrogen you can blend in, but you can use the existing infrastructure.
Jackie Forrest:
And I do think that these higher North American prices, combined with climate policy, are going to help some of these alternatives be blended in more economically and hope it would get us to a lower carbon future faster than electrifying everything, as we talked before in that FortisBC podcast with Tyler Bryant. That electrifying heating, especially in Canada, has its challenges on those cold days. But these higher gas prices actually do, I think, help the case for blending in some other types of lower carbon gases because now, they can compete a little bit easier.
Peter Tertzakian:
It certainly makes the case to insulate your house, if you haven’t done that.
Jackie Forrest:
Yeah. And that’s the other thing, conservation, right? The more energy costs, people really do react to pricing. I still remember the one year, I spent one year living in Japan, worst winter of my life. Because the energy cost was so high, we just froze through the winter. So, this was a place where it barely froze. It was barely below freezing, and I thought it would be an easy winter, but it was much harder than living in Canada. Because the energy prices were so high, everybody just lived without heat. Right? So, high prices really do affect how people behave.
Peter Tertzakian:
Yeah, yeah. Yeah, no, they do. And I guarantee you that the North American energy ethic, I’ll call it, is not like the Japanese where people here won’t put up with freezing in their homes. So, it’s going to be interesting to watch as always, very dynamic. And we will be talking about this story more, I’m sure, as we get closer to next fall.
Jackie Forrest:
Yes. Great. Well, hey, thanks to our listeners for listening to this podcast. If you enjoyed it, please rate us on the app that you listened to and tell someone else about us.
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