Golden Years: The Golden Age of U.S. Natural Gas

The sustained low price for U.S. natural gas is doing exactly what it is supposed to do – attracting new demand into the market.   Gas fired power generation, LNG exports, exports to Mexico and new industrial demand are all expected to contribute to demand growth for many years to come.  But is this a permanent shift in the market, or could the new demand result in increasing prices that would quash the coming Golden Age of Gas?  After all, the natural gas market has seen this movie before.  We explored this possibility in our recent series titled “I’m a Believer”.  But just because it is a possibility doesn’t mean it is going to happen that way, or even that it is likely.   Because the world has changed.  Today we begin a new series that explores the ways in which the natural gas world has changed, and why the gas market is very unlikely to repeat its roller coaster ride of the past three decades.  It certainly doesn’t have to.

Recap of I’m a Believer,” But Will They Still Love the U.S. Tomorrow?

In Part 1 of our recent series on the expected growth of industrial natural gas demand in the U.S. titled "Industrials Say, 'I'm A Believer'", we looked at the factors behind what many think will be an unprecedented shale-driven industrial revival in the U.S., and discussed some key chemical, GTL and other industrial projects now on the drawing boards. In Part 2 we looked at concerns of some of the major industrial players including large petrochemical companies, manufacturers, and even gas-to-liquids developers about the potential impact of increasing demand on price. After all, it is one thing to forecast low natural gas prices over the long run, but quite another to bet $10 billion or so a pop by building a 20-year investment that depends on those forecasts being right.  With dynamics like LNG exports and expanded gas fired power generation poised to increase the demand for natural gas, it is important for investors to consider whether the supply side can absorb that new demand.

So how valid is this concern?  It’s been pointed out that natural gas has looked cheap and abundant before, most recently in the early- to mid-1990s, that lots of stuff like our massive fleet of gas-fired power generation got built, but then supply got tight and everything got expensive and volatile.  Why won’t that happen in the next round of expansion? 

The bottom line is pretty simple--there are two reasons that can cause big, long-term swings in prices:  Government intervention that restricts supply or demand, and a lack of supply either because the gas is just not there, or technology can’t extract it fast enough to match demand.  We’ve had both of these kinks in the U.S. natural gas market for most of its history, but now we don’t.  We really are poised for natural gas to jump into Golden Years that are not the coupon-clipping retirement that term usually means, but instead a genuine Golden Age.

What happened to make today different?  First, the government fixed its part.  The U.S. government, a combination of the Congress and the Federal Energy Regulatory Commission (FERC) actually created a terrific, sustainable regulatory structure for the natural gas industry.  Second, the leaps in technology that have caused the Shale Boom have put the industry in a position to meet  big variations in demand without prices having to go way up long-term.  Without both of these huge, successful advances, we’d be on the same roller-coaster the natural gas industry became famous for, and that still keeps big industrial users awake at night.  But both of these huge, successful advances have actually happened.  Now the challenge is for the industry to gain enough market trust for that success to lead to long-term demand.

First, how about the government?  These days, it’s popular to blame just about everything on government action or inaction, and there’s no doubt that the government had a lot to do with the natural gas industry being broken for a very long time.  It took forty years (1954 through 1993) for federal law to get it right.  Then, there was about a decade (1993 to the early 2000s) of hangover  from the past government policies that brought the industry into full exposure to the second issue, technological limits on keeping up with demand.  But then, in the mid-2000s, that part got fixed, too.  In other words, we had a full half-century when, as Roseanne Roseannadanna used to say, “It’s always something.”  [If you’re too young to remember Roseanne and have not watched the original-cast “Saturday Night Live,” that’s your YouTube homework assignment—watch her Columbia School of Journalism commencement speech.]

We can call those the “Broken Years,” (see Figure 1) up until the early 1990s, when the industry started climbing out of the ditch.  The brief period of expecting to be very reliant on LNG, and of prices jumping around like an unhealthy EKG, represented by the light blue arrow, ended abruptly with the recognition of shale-driven abundance in 2008, setting the stage for today’s abundant supply and healthy market, the golden arrow with the low and stable prices, until now and heading into the future.