The Endurance – LNG to the Rescue
The Endurance – LNG to the Rescue
September 9, 2022
October 27th, 1915, Ernest Shackleton and his crew were forced to leave their ship “The Endurance.” They had been stuck solid in Antarctic ice for 10 months. The crew had waited all winter and through summer to see if the ice would melt, but finally the ship began to break.
Knowing the prospect of spending another winter in Antarctica was untenable, the men concluded they must hike their way to freedom. There was no help coming to rescue them. The crew unhooked the lifeboats, packed what supplies they could, and began marching across the ice.
After hiking for seven days and only traveling seven and half miles, Shackleton realized the plan was not going to work.
“There was no alternative but to camp on the ice and to possess our souls with what patience we could till conditions should appear more favorable for a renewal of the attempt to escape” wrote Shackleton in his journal.
After a long winter on the ice sheet, they slowly drifted north. On April 7th, 1916, the mountain peaks of Clarence and the Elephant Islands came into view. The men were ecstatic with hope, but the journey was far from over.
On April 9th a small group lead by Shackleton left the ice for the first time since January of 1915 and made their way across the treacherous ocean in the lifeboats rowing for land. When they finally made it to shore the wind had pushed them to the opposite side of the island from the Whaling Station.
Shackleton and his men then had to hike across mountains and glaciers for 36 hours straight before they made their first contact with human civilization in nearly two years. He then had to launch another expedition to go save the rest of the men. All 26 crew members survived.
For decades the U.S. natural gas market was just as stuck as The Endurance. Except it wasn’t frozen in ice, the methane produced in America was landlocked in the lower 48, until February 16th 2016, when the first LNG export facility sent its first shipment, and U.S. gas was finally unleashed upon the world.
Today the U.S. is the largest LNG exporting country and currently has ~12 Bcf/d of capacity operational for export. This is creating a tsunami of new liquified natural gas supply on the world LNG markets and is set to upend the current energy world order.
Like the Shackleton expedition, the prospects for U.S. natural gas seemed dim the last decade. Nat gas prices languished in the $2.00-$3.50 per mmbtu range and many of the top producers were struggling to survive. In 2020, the balance sheets of these producers were under serious strain and much of the U.S. shale gas reserves were marginally economic to produce, let alone supportive to drill for new supply.
Then the pandemic hit, and prices for LNG collapsed around the globe. In 2020 natural gas prices in Europe were trading at under $2.00 per mmbtu. Global investment in new drilling and exploration plummeted to levels not seen in decades.
But as the world’s economies started to reopen natural gas prices started to climb, gradually then suddenly, the global LNG market went from over supplied to under supplied, and prices began to soar. At the start of 2021 natural gas global benchmarks were around ~$7.00 per mmbtu and reached an eye watering $37.00 by the end of the year.
Slow to refill storage at these price levels, European gas marketers were waiting on the sidelines for the price action to calm. Then in early 2022 reports began to surface that Russian troops and equipment were beginning to build up on the Ukraine border. Even during these months before the war in Ukraine started many of the world’s leaders did not believe that Putin was actually going to invade.
On Thursday February 20th, 2022, Russia launched the largest ground war offensive since World War 2. The trap had been set, the plans had been laid, Russia was the largest natural gas exporter to the European Union and had the continent in a precarious situation. As we wrote about in our newsletter last week the energy crisis is here.
Now Europe is scrambling to fill storage and replace Russian natural gas before the winter hits.
As we discussed in our last piece it is difficult to imagine a positive outcome this winter for Europe, but over enough time markets are efficient, and new beginnings will come from this crisis.
Enter U.S. LNG.
According to the EIA, most U.S. LNG exports went to the EU and UK during the first half of the year. Expect to see this trend continue as Europe tries desperately to decouple itself from Putin’s gas and realign the European energy markets with their allies across the pond.
The good news for Europe (and the world) is that as more LNG import/export capacity is installed we can expect to see Russia’s power over the European energy markets start to wane.
The bad news is that the U.S. is fighting its own war, a civil war, on American energy.
In February of 2022, right as the Ukraine war was about to begin, a group of U.S. Senators from the Democratic Party wrote a letter urging the Department of Energy to halt approvals for new LNG export facilities. It is hard to think of a more damaging policy to our allies in Europe or a more beneficial policy for Vladimir Putin.
Luckily this movement hasn’t gained steam, but there are other threats to U.S. natural gas exports looming on the horizon.
For years it was a common assumption that U.S. natural gas supply growth was perpetual. We have an ocean of reserves, enough by some estimates to last for hundreds of years. But a massive chunk of those reserves are located in the Northeastern U.S., where the ability to build new natural gas infrastructure pipelines has become difficult, if not impossible.
As you can see from the chart below there is enough “unconstrained” production available to meet the permitted U.S. LNG export facilities in the works. The problem is that the “unconstrained” production in the graph is a representation of the “potential supply” that is available, but there will need to be significant investment in new pipelines to get this supply to market.
U.S. Supply vs. Domestic and LNG Feedgas Demand, Source: RBN
Environmental activists have stopped recent attempts to commission new long haul natural gas pipelines from the Northeast to the Gulf LNG export facilities, and the movement doesn’t seem to be letting up any time soon.
It is critical for global energy security that we get these pipelines built and get our abundant natural gas onto the world markets. If the goal is to help Ukraine and hurt Russia, our best hope is unleashing American energy on the world.
Like Shackleton and his crew, we believe there will be a happy ending to this story, but just because we are off the ice, doesn’t mean we have made it to safety yet.
Market Update
Crude Oil
At the time of the newsletter, WTI was trading at $83.42/bbl. Crude prices consistently decreased this week following an inventory build of 8.9 mm bbls and continued concern of inflation, high interest rates and looming demand destruction due to China’s renewed Covid lockdowns.
Effective December 5th, the U.S. is asking that China and India, two of the largest consumers of Russian crude, force a crude price cap. However, Russia has said that they will not sell crude at a cap and will find another market.
OPEC+ cut the October production target by 100,000 BOPD. Although the cut is minor, it signals to the market that “the simple tweak shows that we will be attentive, preemptive and pro-active in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry,” Prince Abdulaziz bin Salman said.
The EIA Petroleum Status Report for the week ending September 1st, 2022 reflected a crude inventory increase of 8.9 mm bbls. Cushing storage decreased to 24.8mm bbls. It is estimated that Cushing Tank bottoms represent ~17.4mm bbls; volumes at Cushing have continued to hover close to the minimum storage. Domestic crude production stayed flat as the prior week at 12.1 mm bbls. Refinery run rates decreased to 90.9% utilization. Jet fuel supplied decreased by 0.4 mm bbls from the prior week.
www.eia.gov/petroleum/supply/weekly
Rig Count Update:
The U.S. oil and gas rig total lost a net nine rigs, down to 868, for the week ending 8/311/2022. August 2022 , however, saw an overall net increase thanks to some significant increases (+16 prior week). Oil rigs dropped double-digits (10) to 666 (yikes) with nat gas rigs picking up a rig (202 total) to help offset the loss. Matt Andre, manager of energy analysis at Platts Analytics believes the weekly loss is a “one-week fluke” and that the overall trend will be positive rig growth. He notes that eight of the nine rigs were from basins outside of the “major” shale plays. Although some growth is still expected, it’ll be limited as rig supply in many areas is already tight. The Eagle Ford led the way with three adds to 81, with the SCOOP-STACK picking up a couple of rigs to 46, while the Permian and Bakken each dropped two down to 344 and 44, respectively.
Natural Gas
Natural Gas prices have begun to settle down this week after the long holiday weekend. While prices opened at a healthy $9.02 mark on Tuesday, they have trended downward much of the week, landing in the high $7 range much of the week. With US production setting records high this week as we enter shoulder season, demand pull could take a hit. Weather is also driving the price correction as the cool fall weather is approaching. While the near-term forecast looks to be cooling this weekend, a warmer trend heads back in next week for most of the US. With models depicting tropical storms in the West Pacific, look for this unknown to continue to pressure prices. Russia’s extended shutdown of the Nord Stream pipe continues to put pressure on European supplies. However, Germany announced this week that they are more than prepared to handle the winter season as they have been filling storage quicker than earlier anticipated.
Falling demand continues to be the culprit for declining Midcon prices. Total demand has seen a 1.3 Bcf decline over the past week as power demand has also dipped nearly 400 MMcfd/d. Inflows from the Rockies have declined as well, according to Platts Analytics, down nearly 1 Bcf over the same time. Midcon regional pricing has ANR-OK coming in $0.64 off Henry Hub at $7.49 while NGPL-Midcon is $0.77 back at $7.36.
The EIA released storage numbers this morning, coming in at 2,694 Bcf, representing a net +54 Bcf increase from the previous week. This increase was slightly above marketplace expectations of +51. Stocks were 222 Bcf higher this time last year, however, this week’s levels are still within the 5 yr. historical range of 3,043 Bcf.
Talk Energy Podcast
This episode I had returning guest Daniel Turner on for a livestream conversation. We originally set out to talk about California and the crazy energy policies going on in the state but we covered a lot of other topics as well.
We discuss:
-CA's electric vehicle mandate
-The blackouts in CA and the government telling people not to charge their electric cars during grid emergencies
-The Inflation Reduction Act
-Energy Secretary Jennifer Granholm's letter to refiners
-The Whitehouse blaming Putin for high gas prices and then taking credit for when the prices come down
-Unelected Bureaucrats like Richard Glick and the damage they can do to American Energy
Hope you enjoy the show!
ANCOVA DISCLAIMER: The opinions expressed in this report are based on information which Ancova believes is reliable; however, Ancova does not represent or warrant its accuracy. These opinions represent the views of Ancova as of the date of this report. These opinions may be subject to change without notice and Ancova will not be responsible for any consequences associated with reliance on any statement or opinion contained in this report. This report should not be considered as an offer or solicitation to buy or sell any securities.