The producers and pipeline companies that transformed the US into the world's largest supplier of natural gas may still face their biggest challenge yet: a massive build-out of new LNG export capacity along the US Gulf Coast.
Growing global demand for gas in Asia and Europe could increase the call on US gas supplies by 20pc at the end of this decade by more than doubling US export capacity. That rise in overseas demand could cause gas prices to surge, leaving producers and pipeline companies scrambling to connect prolific US shale fields to Gulf coast markets.
Those higher prices would be good news for companies that produce gas. But they could also sting consumers, who rely on the fuel to heat and power their homes. The 2025 and 2026 calendar strip for Nymex gas delivered at the HenryHub were $3.96/mmBtu and $4.04/mmBtu, respectively, each up by more than 25pc from the current 12-month strip.
Pipeline projects entering service in 2024-2025 in key producing areas near the Gulf coast and farther north in Appalachia will only meet about 60pc of the 18.6 Bcf/d (527mn m3/d) demand pull from new LNG export terminals coming on line through the end of the decade, East Daley Analytics senior director Jack Weixel said. The shortfall could strain existing Gulf coast infrastructure and even lead producers to look for costlier sources of supply, driving US gas prices higher.
While the next two years will be "pretty revolutionary" in terms of pipeline build-out, the probable slowdown following 2025 makes it unlikely that US supply can keep pace with planned export capacity through 2029, Weixel said. That means more pipelines than are currently planned will have to come on line to keep demand from outpacing supply.
Producing enough gas and building the pipelines to match surging LNG exports will be a "herculean effort," as it was when the US expanded LNG export capacity with Calcasieu Pass in early 2022, Rystad Energy analyst Ademiju Allen said. After Calcasieu Pass started loading cargoes, the delayed gas production response sent gas prices over $9/mmBtu before a fire halted exports at the Freeport LNG export terminal, stemming the price increase.
Much of the gas needed to feed new export terminals will come from three key producing areas — the Permian basin in west Texas and southeastern New Mexico, the Haynesville shale, a prolific gas field in east Texas and northern Louisiana, and Appalachia, home to the Marcellus and Utica shales. Each of those areas will face obstacles to growth.
"Fundamentals will lead the day," Weixel said. "If there is enough demand, prices rise and infrastructure will get built."
But "it's going to be a scramble," he said.
Basin challenges
Output from the Permian basin and Appalachia have been "leading the charge" this year, but a slowdown is imminent, and production will likely slip by the end of the year and stay lower throughout 2024, Weixel said. A slowdown in oil drilling in the Permian as producers idle rigs will depress associated gas production, as activity in that basin is driven by crude economics.
Haynesville basin production has also eased recently because of lower gas prices but should rise in the coming years because of all the LNG capacity "shaping up in its backyard," Weixel said.
But while Haynesville production was highly responsive to high gas prices last year, there are "a lot of open questions on how deep that inventory is and how much [output from] it can actually grow," Citi analyst Paul Diamond said.
Constraints on takeaway capacity are much more acute in Appalachia, where regional opposition to the construction of new pipelines limits the amount that producers there can increase output.
This could make the scale of production growth needed to match LNG exports much more difficult to achieve, as more than one-third of US gas production currently comes from Appalachia. Without a material uptick in Appalachia, demand growth from new LNG terminals will outpace supply growth, Allen said.
With several multi-billion-dollar interstate gas pipelines in the eastern US having been called off in recent years, developers are unlikely to take on new pipeline projects that would substantially grow Appalachian takeaway capacity. The 2 Bcf/d West Virginia-to-Virginia Mountain Valley Pipeline, prevailing over local opposition only by congressional fiat, is the exception that proves the rule.
Brownfield expansion projects, which take place on pipelines' existing rights of way, could continue to gradually boost Appalachian production, said Jason Feit, vice president of intelligence at energy consultancy Enverus. But only so much production growth can be achieved through pipeline expansions.
