Four Reasons Why U.S. Natural Gas Has Endured This Pandemic
Good news is on the horizon for U.S. natural gas despite the market challenges brought on by the COVID-19 pandemic, according to experts from the Baker Institute for Energy Studies.
The center approached the future of the global natural gas market in its most recent webinar, with experts Kenneth Medlock, Steven Miles and Anna Mikulska reinforcing that natural gas demand will continue to grow and confirming that U.S. natural gas is, broadly, in a privileged and robust position compared to other energy sources.
Here are four reasons discussed on the webinar for why U.S. natural gas has proven more resilient during this pandemic and will continue to be a valued resource:
#1 LNG infrastructure was built for the long run
LNG developments have ramped up in the past decade as part of a significant effort to export surplus U.S. natural gas production. However, the COVID-related slowdown in natural gas demand has raised questions around whether wide-scale cancellations of LNG projects could be an increasing trend. Although a similar situation happened in the 1980s, where LNG (import) facilities were mothballed due to crashing natural gas prices, Steven Miles, nonresident fellow at the Baker Institute thinks otherwise:
“A multibillion-dollar LNG facility is an asset not going to waste. It is like gas in the ground. It’s going to stay there until prices rise enough to justify its exploitation. And even while shutting in, the LNG plant will continue having an impact in global markets and prices”.
Although the domestic natural gas market might face certain growth constraints in the upcoming months due to overall lower demand, it will benefit from having the established infrastructure to continue shipping gas abroad once activity resumes.
#2 Other countries benefit from affordable U.S. natural gas
Unlike crude oil and gasoline, the natural gas market is not as integrated globally yet. However, the global natural gas market is undergoing a rapid transformation in part due to several LNG projects coming online. This is particularly true for Eastern Europe, which has benefited directly from U.S. LNG’s global expansion as it sheds its dependence on Russian gas. Ana Mikulska, nonresident fellow at the Baker Institute agrees on this:
“With the shale revolution and advances in technology and with the boom in the LNG market, the natural gas market has become more interconnected, much more liquid. And the region has understood that this is a way in which it can transform itself and become more like the Western part of Europe where Russia is not as dominant”.
New U.S. LNG contracts have reduced natural gas prices in Lithuania and Poland by 25 percent and 20 percent, respectively, according to the experts.
#3 U.S. LNG has helped reshape the global gas market into a more competitive one
In addition to providing more affordable natural gas prices, U.S. LNG has contributed to the transformation of the global market in more profound ways. For instance, regional trade clusters have disintegrated amid new competition from U.S. LNG, which has impacted the general dynamics of the market because of the flexible nature of LNG contracts as compared to traditional pipeline movement.
According to Mikulska, increased natural gas supply from U.S. LNG – which was imported into Europe at record levels during this year’s first quarter – played a significant role in minimizing both the economic and geopolitical influence of specific cartels
“U.S. LNG that is flowing into the region [Eastern Europe] creates this opportunity to arbitrage. Not necessarily physical flows, but the ability to deliver gas, specific amounts of gas to a region, that provides this credible threat to any single supplier that could otherwise be dominant in the region.”
#4 U.S. natural gas storage has helped in balancing the markets
The fact that natural gas storage in North America is generally commercial provides much more flexibility to the industry compared to other regions. Greater U.S. storage capacity is also a direct result of natural gas market pricing, incentivizing the industry to generate the mechanisms needed to operate properly.
According to Kenneth Medlock, senior director for the Center for Energy Studies:
“We are not running out of natural gas storage like we are in oil. There is still room for product storage but it hasn’t been needed”.
As a result, compared to other countries’ storage capacity, particularly in Europe and Asia, U.S. storage capacity has played a key role in limiting price volatility and stabilizing the markets.