Gas Line, Q3 2021
Gas Line is a quarterly publication that looks at major news stories in global gas—ranging from project development to markets and geopolitics. My goal is not to cover every story but to draw connections between stories across time and space in order to shed light on the major themes that will drive global gas markets in the years ahead. Today’s market is largely shaped by the rally in European prices, which I explored in this piece and hence is not covered here. My main takeaways from this quarter:
U.S. LNG Exports Starting to Impact Domestic Prices
The bottom line: In the five-plus years since the United States started liquefied natural gas (LNG) exports from the lower 48 states, exports had a negligible impact on domestic prices. In Q3 2021, however, there was strong evidence that exports are the primary demand driver for U.S. gas and thus the increase in prices. This may be a short-lived phenomenon. Or it could a symptom of a new era. After all, the slowdown in supply growth is driven by shareholder pressures. If this dynamic persists, U.S. LNG exports will no longer be an outlet for excess domestic production gas but, rather, a possible driver of higher prices in a system where production growth is slow. That would represent a fundamental shift in the political case for LNG exports—possibly spelling trouble down the line and creating a dividing line between the country’s appetite for cheap energy and its aspirations to be a global supplier.
The backstory: Since U.S. LNG exports began in February 2016, U.S. gas prices have been relatively muted, trading between $2 and $3 per million British thermal units (MMBtu), save a brief, weather-driven spike in late 2018 and early 2019. But starting in June 2021, prices at Henry Hub have been on a steady ascent, breaking through $4 in July, $5 in early September, and reaching $6 by the end of September. This rally has followed a drawdown of gas in storage, which was roughly in line with the five-year average until June, after which time it diverged (but within the boundaries of the recent past). Not since 2014 has Henry Hub traded at $6.
Demand through the first half of 2021 has been flat relative to 2020: more gas has been used in the residential and commercial sectors, while less gas was used for electricity generation. The net effect was essentially zero. Production has also been flat, recovering after the slump in 2020 but basically unchanged on a year-on-year basis and still below the all-time peak of December 2019. And while public data from the Energy Information Administration only go through June, data from Bloomberg show a similar pattern through September. In other words, the domestic supply-demand balance would hardly explain a run-up in prices.
Exports, however, have continued to grow. Exports by pipeline were up 9 percent in the first half of the year, but pipeline imports rose by a roughly similar amount, so the net pipeline balance was the same as in 2020. By contrast, LNG exports were up 41 percent in the first half of the year and have continued to grow (Kpler shows exports up 65 percent through September). This demand pull is not related to the spike in gas prices in Europe and Asia. As long as there is a price disparity between domestic and international prices, it pays to export, but exports are capped by the country’s export capacity, which takes years to increase. Even so, the basic reality is this: with domestic demand and domestic production flat on a yearly basis, it is exports that are proving the most enduring source of incremental demand—and thus a main driver of higher natural gas prices in the United States as the country heads into winter.
Whether this dynamic matters politically depends on how enduring it is. It may be a brief relapse as supply responds to higher prices. But it could also reflect the real constraints placed on the industry by investors who have demanded returns rather than just production growth.
Treasury Offers Clearer Signals on Public Financing for Gas
The bottom line: In August 2021, the Treasury Department released additional guidance for how the United States will approach the public financing of natural gas projects. In some ways, the language clarified what most people understood to be the U.S. position anyway. But in other ways, it signaled an important shift in the country’s geo-economic posture, with significant implications for gas markets.
The backstory: Whether and under what conditions the U.S. government might finance natural gas projects has been an open question from the early days of the Biden administration (one discussed in earlier editions of Gas Line and in this commentary). In August 2021, the Treasury Department issued some additional language on how it will approach the public financing of gas projects. Some of the conditions placed on gas financing were predictable. For example, Treasury said that there must be an analysis showing that no clean energy alternatives are possible and that the project “has a significant positive impact on energy security, energy access, or development.” This is not a surprise.
One restriction that stood out was the provision that the financing be only available to “ IDA-eligible countries, fragile and conflict-affected states, or small-island developing states.” For years, and especially under the Trump administration, the U.S. government had hinted at the prospect of supporting gas projects for strategic or energy security reasons—for example in southeast Europe or emerging economies like Vietnam or the Philippines. The prospect of such financing now seems even less likely.
The other major restriction came with respect to language on carbon capture, use and storage (CCUS) and methane abatement. Treasury wrote: “We are open to supporting CCUS and methane abatement solutions as stand-alone investments for existing fossil fuel projects assuming they do not expand the capacity of the existing project or significantly extend its operational life.” That qualification is puzzling, especially when it comes to CCUS. This is a technology with strong bipartisan support at home. It also a technology that the world needs to deploy at scale on the road to net-zero emissions. It is not clear that a gas project with CCUS—even one where the capacity is expanded or the operational life is extended—would be undesirable from an emissions perspective.
Some Further Reading
- International Gas Union, Global Wholesale Gas Price Survey 2021, July 8, 2021.
- Vitaly Yermakov, Big Bounce: Russian Gas amid Market Tightness, Oxford Institute for Energy Studies, September 21, 2021.
- Mike Fulwood and Jack Sharples, Why Are Gas Prices So High?, Oxford Institute for Energy Studies, September 27, 2021.
Nikos Tsafos is the James R. Schlesinger Chair for Energy and Geopolitics with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).© 2021 by the Center for Strategic and International Studies. All rights