Natural Gas Producers’ Game Plan for LNG: Wait Out 2024

Unlike the winter, the forecast for natural gas prices as 2024 arrives isn’t mild.

Many industry experts predict a strong demand for LNG exports will result in a dominant U.S. position in the global gas market. However, producers are waiting for new LNG export terminals to come online, and another warm winter will spell trouble for a market already abundantly supplied. 

A few cold snaps hit parts of the U.S. in October and November. However, the influence of El Niño has driven a relatively warm winter in the northern U.S., which is the prime area of the country that uses gas for heating.

According to the U.S. Energy Information Administration (EIA), natural gas storage on Dec. 1 was at 3.719 Tcf, about 6.7% above the five-year average of 3.485 Tcf. Natural gas storage levels have been above the five-year average since January, and the price of gas has stayed under $3/MMbtu for most of 2023.

Jack Weixel, senior director of East Daley Analytics (EDA), said that if the temperatures stay elevated, the price of gas is in for a rough spot around spring.

“15-day weather forecasts have been mega-bearish for the market and essentially have told the market that, as far winter is concerned, December is cooked,” Weixel said. East Daley estimated that a warm winter would sap about 2 Bcf/d of incremental residential and commercial demand. “January and February are still somewhat unknown, but overall, the damage may already be done unless those months are unseasonably cold.”

The natural gas market has been reacting to the weather news: January 2024 futures price fell 5.8% on Dec. 11 to $2.431/MMbtu, the lowest price since June.

“What this means is that the market has come to a realization that storage will remain above the 5-year average for the foreseeable future and end-of-season March inventories could come in over 2 Tcf, or a surplus to the 5-year average of around 500 Bcf,” Weixel said. “That kind of surplus means $2 gas and, if it were to grow larger, sub-$2 gas.” 

Meanwhile, U.S. gas producers have not significantly decreased their output, according to the EIA.

U.S. natural gas production hit a monthly record high in May 2023, with 3.869 Tcf in gross withdrawals, according to the EIA. The monthly production was been above 3.71 Tcf for eight of the first nine months of 2023, while monthly production hit that threshold five times in all of 2022.

Gas production in some parts of the U.S. continued to increase into the end of 2023, despite the high inventories. EDA noted that gas samples for flows heading out of the Permian Basin hit a record 6.3 Bcf/d in November.

High production may seem counterproductive when storage is full, but the natural gas industry is focusing on transitioning, according to EDA. Producers are preparing for 10 new LNG export terminals opening on the North American coastline, resulting in a dramatic increase of LNG for the global market. Capacity is expected to more than double by 2027, from 11.4 Bcf/d today to 24.3 Bcf/d. Most of the projects are in the U.S., though Canada and Mexico are adding capacity as well.

Venture Global LNG targeted its Plaquemines LNG facility in Louisiana to begin exporting by the end of 2024. The Golden Pass LNG facility near Port Arthur or the Corpus Christi Stage 3 LNG facility, both located in Texas, are expected to come online in 2025. However, Cheniere Energy’s Corpus Christi facility is ahead of schedule and may start production by the end of 2024.

The international demand for North American LNG came from several trends over the last few decades. Countries in Europe and Asia are seeking LNG supplies thanks to its predictable availability from the U.S. and a tightening supply of natural gas abroad, said Majed Limam, Americas’ manager for Poten & Partners’ natural gas and LNG advisory team.

“LNG is naturally more flexible than pipelines. LNG can directly connect the buyers and the seller point to point,” Limam said during a seminar on the impact of global conflict on future LNG supply projects.  “Also, the low-hanging fruits, the gas fields that used to be closer to the buyer, are gone.”

Russia’s invasion of Ukraine in 2022 — and the political fallout that followed — interrupted gas pipeline flows to Europe. The war has bogged down and appears to be in a long-term situation, meaning that European countries would prefer another source for the long term as well. In 2022, LNG became the primary player in the global natural gas market, taking 56% of market share versus the 44% delivered by pipelines.

“Europe has learned a lesson,” Limam said. “A strong reliance on Russia for energy is dangerous. The infrastructure has been developed to provide Europe alternatives to Russia and Europe will use that.”

U.S. to play pivotal role

According to Poten & Partners, the U.S. will play a key role in adding new supply to meet growing LNG demand. Over the next five years, 50% of new LNG supply on the world market —about 180 million tons a year — will be sourced from the U.S.

For the time being, however, North American natural gas producers will have to wait for export capacity to come online, or for the weather to change, domestically and overseas.

One of the primary LNG shipping routes for Gulf Coast facilities, where the majority of U.S. LNG is produced, is through the Panama Canal to East Asia.

A drought in Panama in 2023 forced the canal authority to cut the number of vessels allowed to pass through to 32 from 38 in July, with more cuts expected to come at the end of 2023.

Shipping through the Panama Canal costs $1.68/MMBtu. Shipping to East Asia through other routes costs more than $2.50/MMBtu, Limam said.

Some relief in sight

The U.S. domestic market should provide some relief for gas producers, even without a cold winter in 2024. Natural gas now generates more electricity than any other source in the U.S., according to the EIA. Gas-powered generation produced 39.9% of American electricity as of Oct. 23, while coal finished in second at 19.7%. The trend is expected to continue as coal plants are retired to reduce CO₂ emissions. 

Weixel said natural gas prices should start rebounding before the LNG facilities come online.

“The only cure for low prices is low prices,” he said. “Production slows, the storage surplus erodes as net summer injections trail the 5-year average injection. Cheap gas means elevated power burn throughout the summer.” 

By August, the market will react to an emerging storage deficit before winter. By then, near the beginning of 2025, some of the newest LNG terminals will start to come online.

“The 2024-25 winter strip should start to respond, and prices should begin a sharp recovery,” he said.