Tuesday, June 30, 2020

Natural Gas: Projects Will Be Deferred At Current Prices, Some Production May Be Shut In

A twofer. First up S&P Global Platts Interview with EY's head of oil & gas, Andy Brogan, June 25
  • Gas demand will eventually outpace supply growth
  • Oil shortage unlikely despite IEA warning
  • Brogan says oil like coal, reserves easy to tap
London — Fears of a crude supply crunch in the coming years are overblown, as economically driven shut-ins, particularly in the US shale patch, could be reversed with relative ease, but that is not the case for gas as the spate of project deferrals could eventually lead to shortages, the head of oil and gas for consultancy EY, Andy Brogan, said in an interview with S&P Global Platts.

While gas prices were currently depressed and looked likely to remain so for the next few years due to overcapacity, overall gas demand was expected to continue rising. Eventually, demand would outpace new supply additions, given that a number of new LNG projects had been canceled or deferred due to market conditions, Brogan said.

"There's a lot of capacity available from projects where most of the cost has already been sunk," he said. "In the medium term, you can see that these project deferrals will begin to have an impact. But in the short term, gas kind of looks stuck where it is."

Oil demand, however, was likely to remain impaired for a while as the global economy recovered from the coronavirus pandemic. Between lower demand and OPEC+ production cuts, there remained ample spare capacity to supply the market's foreseeable needs, Brogan said.
Should demand fully rebound and new production be needed, wells could easily be reactivated or drilled in fields where production had been reined in, whether due to OPEC+ cuts or economic factors, such as in the US and Canada.

"There are substantial resources available that can be converted into reserves and produced if the price signal sort of points in that direction," Brogan said. "Now you could say that's always been the case. But I think now those resources can be converted into reserves and produced in a six-month time frame, not a five-year time frame."....

And from OilPrice, June 28:
Natural Gas Price Plunge Could Soon Lead To Shut-Ins
Natural gas prices plunged to new lows this week, falling below $1.50/MMBtu, a catastrophically low price for U.S. gas drillers.  The factors afflicting the gas market are multiple. Prices had already fallen below $2/MMBtu at the start of 2020, weighed down by oversupply. But it wasn’t a problem confined to the U.S. There was also a global glut of LNG due to a wave of capacity additions in 2019.  

That was the situation heading into 2020. But just as the Covid-19 pandemic tore apart the oil market, natural gas also went into a tailspin. Global gas demand is expected to fall by 4 percent this year, “largest recorded demand shock” in history, according to the International Energy Agency. 
Buyers of U.S. LNG are now cancelling shipments at a rapid clip. U.S. LNG exports have declined by more than half compared to pre-pandemic levels.

“There would have been too much LNG in the world even without Covid-19,” Ben Chu, a director at Wood Mackenzie’s Genscape service, said in a statement. “Covid-19 has made it worse.”
Buyers abroad are willing to pay a cancellation fee instead of receiving shipment from U.S. exporters, a sign of how badly the market has deteriorated. For August delivery, between 40 and 45 cargoes have been cancelled, nearly double the rate of cancellation in June. 
Typically, cheaper gas can stimulate demand, particularly in the electric power sector. But that outlet is not as large as it may have been in the past, not least because gas has already been cheap for quite some time. Thus, the coal-to-gas option is limited. Without an export route, and without larger uptake from utilities, the gas glut has deepened. 

“As a result, we see US gas production shut-ins, which we had been discussing as a risk, as now part of our base case for this summer,” Goldman Sachs warned in its report. The bank sees roughly 2 Bcf/d of shut in gas supply for about two months in order to head off storage congestion. 

The shut-in process can be thought of as “the last shoe to drop in a global gas rebalancing process,” Goldman added. The logic goes something like this: the LNG market was oversupplied, Asian LNG prices fell, more LNG was routed to Europe, that pushed European gas prices down, which then led to the closure of the economic window for sending American gas abroad. ...

And via the CME the response of the futures to Chesapeake's bankruptcy announcement on Sunday the 28th: