Moving Forward With Natural Gas And LNG (NG1:COM)

Markets moving natural gas (NG1:COM) prices are still much alive. In the past few months, prices bounced between $9.5 and $5.0 per therm, not a small change. Price volatility driven by market uncertainty, both in Europe and the U.S., dominates the landscape. A primary reason resides with the Freeport, Texas LNG on again off again startup. Even with volatilities, certain grips upon pricing and several predictable factors still run the show. So let’s move forward with an analysis beginning with U.S. production and usage.

Production vs. Usage

A recent EIA storage report and graph, which follows, shows internal consumption equals production.

It should be noted that with the world and U.S. opening after the virus shutdowns (end of 2020), the storage began a slight negative deviation until the summer of 2022. A critical event occurred that summer, when the Freeport, Texas LNG facility suffered an unplanned shutdown from a pipe rack explosion. A discussion of the magnitude of this effect follows later in the article.

Continuing with U.S. NG production facts, again from the EIA website, the next graph shows actual total production for approximately 25 years.

Of most importance is the significant increase in production up through 2020 followed by flat-lining.

Next, from Trading Economics, a graph illustrates NG price from the last 12 months.

European Difference

The price of NG in the U.S. has become dependent upon prices in Europe, with the Russians cutting off significant supplies it once exported to Europe. The next chart shows a one-year graph for Europe.

The second peak formed in the U.S. shows significant European influences on both sides of the formation.

LNG Sources and Expansion

Before we continue, it seems important to discuss the sources of LNG and NG production within the United States. Five regions produce 70% of the nation’s NG. From an LNG standpoint, by far the area which produced the largest growth and amount for the last 8 years is the Appalachia, a major production region for MPLX (MPLX). The Permian ranks second, followed by Haynesville. “Finally, the Anadarko, Niobrara, and Bakken rose by a combined 4.6 Bcf/d over the timeframe.” Production at Eagle Ford actually fell slightly.

The industry expects growth:

“A rise in North American LNG exports is expected to triple the region’s current natural gas market over the next decade, supporting 29 billion cubic feet per day (bcfd) of production from 2022 to 2033.”

However, energy experts have predicted that the second wave of U.S. LNG growth will favor the southern basins primarily, the Permian. The issue stymieing the northeast is governmental interference into new pipelines. “Indeed, EQT Corp. (EQT) CEO Toby Rice recently acknowledged that Appalachian pipeline capacity has “hit a wall.” Growth in the Anadarko, Niobrara, and Bakken will remain modest if at all.” Continuing,

“RBN notes that both the Permian and Haynesville have been at the epicenter of midstream development in recent months while the Eagle Ford has been showing signs of a production recovery of late, after a decline in recent years.”

Finishing with LNG, during the last year, developers have signed on to 20 deals equaling over 30 million metric tons/year vs. approximately 80 million metric tons. If goals are to be met, LNG production must increase by approximately 40%, no small amount nor task.

Freeport, Texas LNG

As discussed above, recent news for Freeport suggests that this LNG facility is expected to initiate startup beginning at the end of December, continuing through spring for full rates. Freeport consumes approximately 5% of the U. S. production and has the capacity to produce 20% of America’s LNG. But on the 12th of December, the FERC sent the company “a long list of 64 conditions that had to be met before it could approve the restart.” Freeport reported that in spite of the list, it was holding to its plan for a startup beginning before the end of the year. But most recently, it updated the dates into the middle of January. The lateness and length of questions, smacks of government interference. Why so late? Why so long? Could it be that Washington is purposely trying to obstruct the startup of Freeport in order to slow NG exports during the winter months in North America? Nevertheless, this facility should start up in the near future, increasing demand thus pressuring at some level the price of NG in America. For investors, this likely spells good news. For users, it doesn’t.

Summary

The exporting of NG in the form of LNG toward Europe and the World will likely grow over the next several years. Some industry analysts believe growth will come from both the Permian and Haynesville basins. Companies such as Kinder Morgan (KMI), MPLX, and Tellurian (TELL) have resources attached to these basins, with Kinder Morgan and MPLX involved in the Permian and Tellurian building access at Haynesville. Note: both of these regions lack pipeline infrastructure for transporting expected growth. Watch for companies willing to invest into infrastructure seems paramount.

Risk

Risk abounds. North America and other world regions are expecting a recession, which might affect demand at some level. A second risk lies with government’s apparent distaste for fossil fuels in almost any form. The strange long to-do list sent by the FERC to Freeport at the very last moment seems aimed at nothing more than governmental interference. A last risk resides with an end of the European war and the NG supplies which naturally come back on stream. Each of these represents risks, with probably the last one being the most important. But with a very real and influential group attacking fossil fuel, especially coal, NG use seems posed for real growth. Finding investments which link closely with growth regions seems prudent for investors.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.