A Kickstart for Natural Gas?
How the looming bankruptcy of US shale oil drillers might help American natural gas
The world currently is nobody’s oyster, and most certainly not the oil industry’s one. The shale petro-drillers in the US south, until recently the favorite child of president Donald Trump and other advocates of ‘energy dominance’, now need a miracle to bring their debt-riddled balance sheets back into the black. Many American oil companies’ revenue streams were hit by a double whammy of Saudi-Russian oil war and a global collapse in oil demand due to the pandemic. Running out of cash and of new investors, they now face a premature end to their operations.
What many don’t realize is that shale oil producers do not just pump oil out of the ground, but also produce natural gas. In 2018, 25% of US production of natural gas came in the form of this so-called ‘associated-dissolved’ gas right out of the oil rigs. While the bankruptcy-induced decline in production could benefit non-associated natural gas producers, it will hurt the nascent American liquified natural gas (LNG) export industry, which was set to expand its global reach considerably until only a few months ago.
A story of two booms
Natural gas is often considered to be the “white sheep” in a family of “black” fossil fuels, mainly because power plants running on natural gas emit far less greenhouse gas emissions than their coal-fueled siblings (natural gas is about 50% less carbon-intensive than coal). The same is true for industries like steel and chemicals, which use natural gas to heat up their production processes or for families cooking their Sunday roast with it. Switching coal for natural gas has allowed the US to bring its total emissions down to levels unseen since 1991. This statistic, unfortunately, omits that natural gas still has damaging effects on global warming, specifically due to methane leaks. It is not widely known that due to current methane leakage levels of 2–3 percent of total natural gas production, widespread production of natural gas might be even worse than coal in terms of global warming. That stems from the unfortunate fact that natural gas itself (consisting of 90% methane) is a significantly more potent climate-forcing gas than CO2.
Similar to the recent oil boom’s sources, the USA’s natural gas reserves lay mainly in so-called shale formations, which require horizontal drilling and fracking to be tapped. Advancements in drilling technology is opening up these reserves more and more: despite yearly production growth of around 10%, proved reserves grow even quicker. At 2018 production and reserves levels, the US could maintain the current level of natural gas production for another 15 years. Meanwhile, the US Energy Information Administration (US EIA) expects gas production to rise throughout the next several decades and sees vast undiscovered potential gas fields lurking under US soil.
Natural gas, therefore, now occupies a large spot in the heart of America’s economy and energy system: 29% of US electricity comes from natural gas, and it fuels 24% and 32% of the U.S. residential and industrial sector’s total energy consumption respectively. In fact, production growth outpaced domestic demand so quickly that for the first time since 1996, exports overtook imports in 2017 and stood at 10% of all production in 2018. However, due to simultaneous high imports, net exports are only 2% of US natural gas production. The rapid increase in US natural gas supply even inspired geopolitical maneuvers by the Trump administration to get Europe hooked on American instead of Russian gas. It has also funneled tens of billions of US-dollars of investments into the construction of gas liquefaction factories in Louisiana, from where tankers with the fresh LNG can leave for Europe and Asia. Meanwhile, two thirds of US gas exports go to Mexico via pipelines.
Oil goes down, gas goes up
While global demand for gas had already been saturated before the Coronavirus crisis due to a warm winter, it has fallen evermore sharply since. Storage for natural gas in Europe and around the world is filling up, and although existing delivery contracts are still being executed, future demand looks less rosy.
As oil prices are still at record lows, making U.S. shale oil production vastly unprofitable and driving oil producers into insolvency, natural gas exporters now not only face diminishing demand, but also missing supply.
As soon as the Coronavirus lockdown is over and global gas consumption picks up again in a possibly colder winter of 2020/21, by then 25% of US natural gas production might have disappeared. This concern is underscored by EIA projections, which in 2018 assumed that a global price on oil of US$56 would be necessary to see a relevant share of natural gas coming from oil drilling. With the decline in shale oil production, all the expensive LNG factories in Louisiana would run idle.
Oil-independent natural gas producers have sunnier outlooks, however. The decline in associated gas would pierce the global pre-pandemic supply glut, thereby providing them with healthier prices. Additionally, only a quarter of US gas reserves lay in oil formations, and the EIA estimates vast reserves independent from shale oil are yet to be tapped. Non-associated gas producers are thus prone to expand their production, their operations possibly also benefitting from former oil investors who are now looking for new investment opportunities.
The supply excess in the natural gas market will however only be solved if more gas is burned for electricity and heating. This, in turn, depends on the outcome of a more fundamental discussion: Is it worth to further expand an industry which is highly volatile and contributes to climate change, or will we reap more benefits with lesser risks investing in clean energy? I think we might know the answer to this one.
