Ongoing Shortages for Global Natural Gas Pt 328 Feb 2022 21:24
Expansions at Cheniere’s Sabine Pass and the start of a new US LNG export terminal, Calcasieu Pass, will push LNG export from 10 bcf/d to nearly 12 bcf/d in 2022 leaving the US as the largest LNG supplier in the world, ahead of Australia and Qatar. This is an incredible milestone, considering that, as recently as the mid-2000s, consensus opinion held that the US would require massive LNG import terminals to meet domestic demand.
All this demand is having an impact on US inventories which now stand 250 bcf below seasonal averages. Although not as dire as Europe, the US remains vulnerable to any bout of cold winter between now and the end of the winter heating season in late March. One interesting observation is that over the past decade, North American autumns have become
milder while springs have become colder. If this pattern occurs this year, prices could spike.
On the supply side, the US shales are once again growing. Between January 1st and December 31st, the shales grew by 2.4 bcf/d after having declined by 1 bcf/d over the same period in 2020. While this is certainly an abrupt change, it’s a far cry from the 2017 to 2019 period when US gas supply regularly grew by 10 bcf/d or more each year. Last year’s growth came mostly from Haynesville shale in east Texas and Louisiana which saw dry production grow from 12.5 bcf/d in December 2020 to 14 bcf/d twelve months later. Our models tell us this growth may be harder to achieve this year. Much of last year’s acceleration was caused by drilled but uncompleted wells. Between December 2020 and 2021, operators increased their drilling activity by 28% from 39 to 50 wells per month. Over the same period they increased their completion activity by 150% from 23 wells to 58 wells per month. Since 2014, the industry on average has completed 93% of the wells it has drilled and if that ratio holds again in 2022, production growth will likely slow from 1.5 bcf/d from January 1st to December 31st to only 500,000 mmcf/d.
The other main source of growth was the Permian Basin. As we discussed in our oil section, DUC liquidation had a huge impact in 2021. Whereas the industry normally completes 93% of the wells it drills, 2021 saw this jump to 150% -- clearly unsustainable. Were the Permian operators to revert to its long-term average, dry gas production would likely stop growing entirely. Also, keep in mind LNG export capacity will increase by 2 bcf/d this year and all that supply will likely be needed to meet international demand. Therefore, if the US shales do grow, albeit at a slower rate, domestic inventories will likely fall from here. If we experience a colder than normal later winter and spring in the US, we could see significant upside price pressure.
We are currently undertaking a major overhaul of our neural network models and hope to have new insights regarding US shale production in our next letter.
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