The growing glut of natural gas on the global market – spurred in part by increased exports of Liquefied Natural Gas (LNG) by U.S. producers over the last year – reminds us of the dynamic nature of the domestic natural gas market, and the role shifting public policies have played into that over the years.
My own frame of reference here begins during the summers of 1977 and 1978, when I earned college tuition money by taking summer jobs on pipeline crews in deep South Texas. In 1978, the Congress and the Carter Administration had become convinced by some really bad science that the U.S. would actually run out of natural gas in a few decades, and thus needed to conserve what little remaining reserves it had on-hand for home heating usage. Acting on this belief, then-President Jimmy Carter signed into law the Natural Gas Policy Act (NGPA) and the Fuel Use Act (FUA), both of which had major impacts on natural gas markets, and both of which inhibited investment in new natural gas-burning infrastructure.
The NGPA discouraged investment in drilling for new natural gas reserves by allowing the federal government to establish ceiling prices producers could receive for various categories of natural gas that were established under the law. The FUA was even more prohibitive on the demand side of the natural gas ledger, prohibiting utility companies from building new gas-fired power plants. The result? A Democratic Administration ironically actively encouraged the building of dozens of new coal-fired and nuclear power plants all over the United States, many of which are still operating, much to the chagrin of today’s climate alarm lobby.
Congress and President Ronald Reagan began de-regulating the natural gas market in 1985, completing the process in 1987, the same year that the FUA was also repealed. Thus, utilities were once again able to invest in new gas-fired generating capacity, but the long lead times inherent in such major projects did little to absorb the new natural gas production coming onto the market.
Natural gas prices, which initially showed strength upon de-regulation, soon collapsed as new supplies quickly began to out-pace demand. During the early 1990s, producers in the pipeline-constrained San Juan Basin found themselves often selling natural gas at prices below 50 cents per mcf.
During the latter half of the 1990s, investments in new gas-fired power plants, along with new investments in chemical, plastics and other major users of natural gas, began to catch up with supply and prices for the commodity in the U.S. grew stronger. But a series of supply disruptions from the Gulf of Mexico due to major hurricane events in the late 1990s and early 2000s once again led to fears of looming supply shortages in the early days of the George W. Bush Administration.
In 2003, Energy Secretary Spencer Abraham directed the National Petroleum Council to perform a study about the potential for natural gas in the U.S. to meet then-growing demands, and create a forecast through the year 2025. We must remember here that the Barnett Shale was in its early days of development, and most in the industry believed the potential for shale natural gas was likely to be pretty limited. Other of today’s huge shale plays – the Haynesville, Marcellus, Eagle Ford, et al – were yet to be discovered.
Because of the timing of this study – on which I chaired one of the committees – and the limited knowledge base surrounding shale natural gas at the time, the report projected stagnating production from conventional formations, low potential for shale natural gas, and a growing demand for LNG imports, which were projected to provide well over 10% of overall U.S. supply within a few years.
The release of this report spurred a rush among some of the country’s largest natural gas producers – including ExxonMobil – to apply for federal permits to invest billions of dollars in the building of new LNG import facilities and new fleets of LNG tankers. By 2005, more than two dozen such terminals were in the application stages, and half a dozen were ultimately constructed before the natural gas market changed yet again.
Within just a few years of the release of the 2003 NPC study report, the real bonanza in U.S. shale natural gas had begun in earnest, with huge new volumes of natural gas coming onto the market in places like Pennsylvania, Louisiana, West Virginia, Arkansas and South Texas. The advent of these new, affordable supplies in turn began to lead to major new investments in gas-using manufacturing infrastructure.
Suddenly, the previous rosy prospects for LNG import demand began to dim. Then, in 2009, Barack Obama became President, and an aggressive new climate change-driven regulatory policy created new incentives for power providers to accelerate the retirement of older coal-fired plants – many of which were ironically built thanks to the incentives provided by the long-defunct FUA – and replace them with new combined-cycle natural gas-fired capacity.
But the new natural gas supplies just kept on coming, as hydraulic fracturing and horizontal drilling technologies continued to become more efficient and refined, causing the once-strong commodity price to fall to lower levels, which have now persisted for half a decade. Lower prices always cause producers to look for new markets, and so, beginning in 2010, there was a new rush related to LNG infrastructure, only now it was for permits and financing to enable the building of LNG export facilities.
While the Obama Administration was initially slow to begin issuing the permits necessary to build such facilities, once the first one was issued to Cheniere Energy’s Sabine Pass terminal, additional permits began coming with increasing frequency. Today, eleven LNG export facilities have been permitted by FERC, and although Sabine Pass remains the lone active terminal, six more are currently under construction.
But is it too late? Has the industry’s ability to build infrastructure once again been so slow that it has largely missed the market? As the Wall Street Journal reported yesterday, LNG exports from the U.S. and other major producing countries are creating a global glut of the product , and tanking prices in the process. Natural gas futures prices in the U.S. have dropped by about 25% since December, during the time of year when the commodity price has been historically expected to firm up.
The capital investments for the half-dozen export terminals currently under construction are already baked into the cake, so most if not all of them will ultimately be completed. The big question right now is, will there be a market in existence for their product when they come on-line? That’s a multi-billion dollar question, and right now – as has been the case so many times in the past where natural gas is concerned – no one really knows the answer.