By John Richardson
CONVENTIONAL thinking about US natural gas prices is that they will start to edge up over the next few years.
Reasons include major shale gas investment cutbacks resulting from the recent collapse in US natural gas pricing.
Gas availability is also widely expected to tighten as a result of cutbacks in US oil output – again of course because the collapse in oil pricing will force the oil industry into similarly-big reductions in investment. When oil is produced via the shale process you often also get “associated gases” – e.g. ethane, propane and butane contained within shale-oil wells.
In the case specifically of ethane, which matters hugely for the US petrochemicals business, ethane prices are expected to rise on the flood of new ethane-based polyethylene (PE) capacity due on-stream from H2 2017. These start-ups are expected to significantly tighten local ethane supply.
There is also the emerging ethane export trade. If many more companies follow the example of INEOS and Reliance Industries in exporting US ethane for cracker operations elsewhere, then this might further reduce availability and so push ethane prices higher.
But what if the expectation of more expensive natural gas is the result of another wrong framework of ideas, as the case with US oil and with global oil markets in general?
There is a danger that too many people who study US natural gas markets are stuck in what I think can be best described as “Old Normal” thinking. Here are my three reasons why:
- This is another example of the “anchoring” concept, which was developed by Nobel Prize-winning psychologist Daniel Kahneman. This is the common human tendency to rely too heavily on the first piece or pieces of information offered (the “anchor”) to you when making future decisions. Let me give you an example. When you first started studying natural gas markets, Henry Hub methane prices might well have been in the region of $10/mmBTU. So you treat recent prices of less than $2/mmBTU as an anomaly, and all your analysis pushes your long-term forecasts as near as realistically possible to that $10/mmBTU.
- You quite likely didn’t recognise that the economic Supercycle was going on in the first place, and so you have of course missed the fact that it’s over. Now that it’s over, the US is going to continue to struggle for broad-based and sustainable economic growth. As with oil, therefore, why not produce as much gas as possible in order to create jobs?
- As the excellent chart above illustrates – from the latest issue of the PH report - technology hasn’t stood still in shale gas, just as has been the case in shale oil. Hence, the efficiency of US gas rigs has improved 13-fold since 2006.
You thus have a combination of a strong economic imperative to keep US natural gas production at very high levels combined with the technological ability to do so at very low cost.
There is thus a scenario where US natural gas prices remain at today’s historically low levels over the long term. In fact, why shouldn’t prices go even lower?
Wouldn’t this be great news for the US petrochemicals business then, thanks to a continued huge ethane cost advantage over naphtha?
No, because oil will remain very cheap as well – leaving naphtha where it is today: A very competitive petrochemicals feedstock indeed versus 2014.
And you have to remember what oversupplied energy markets say about demand. It is again that the Supercycle is over. So, regardless of relative feedstock advantage, the biggest challenge for petrochemicals producers everywhere will be in actually selling their volumes.