American Oil and Gas Reporter - December 2015 - 42

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SpecialReport: Natural Gas White Papers
In future years, however, these swings could be much more
dramatic. Partly in response to low prices, natural gas demand for
space heating is expected to increase, which would exacerbate
swings between cold and mild winters. As coal and nuclear plants
are retired and gas-fired generating units account for a larger percentage of total generation, year-over-year swings in power sector demand for summer and shoulder months also could grow.
LNG Demand Sensitivity

The most significant factor leading to increased weather-sensitive demand, however, is the expected role of future LNG exports. Global LNG demand is highly sensitive to winter weather already and could become increasingly sensitive in the future
as imported LNG used in gas-fired generating units becomes the
marginal source of supply to meet variations in electricity demand
in many parts of the world.
This could set up a minefield for the U.S. natural gas industry. In years in which weather conditions in the Unites States, Europe and Asia are reasonably close to normal and utilization rates
at U.S. liquefaction facilities are high, U.S. producers are likely to be able to readily meet demand without significant upward
price pressure.
However, if the following year's winter demand is much lower than normal in much of the Northern Hemisphere (as is expected this year), year-over-year demand for U.S.-produced gas could
decline by as much as 2.5 Tcf-4.0 Tcf (the equivalent of 7 Bcf/d11 Bcf/d over 12 months), resulting in an unprecedented glut in
the U.S. market, which could drive prices to historic lows.
Finally, the prospect of LNG exports, coupled with increased industrial demand and soaring exports to Mexico, is transforming U.S. pipeline infrastructure. Over the next few years, some
30 Bcf/d of new take-away capacity is expected to be built in the
Northeast, enabling LNG export projects and end-users in South

ANDREW D.
WEISSMAN

Texas and Mexico to tap low-cost resources in the Marcellus and
Utica.
This new take-away capacity should pare basis differentials
in the Northeast, increasing margins for Marcellus/Utica producers and triggering a new wave of development. At the same time,
competition to serve demand in the Midwest, Southeast and Gulf
Coast will intensify, pushing down prices at many hubs.
In years in which weather-driven U.S. demand and global LNG
demand are reasonably strong, margins still may be acceptable.
But given the magnitude of the low-cost resources available in
the Northeast, the sub-$1.50/MMBtu pricing experienced in the
Northeast for much of this year could spread to other parts of the
country in years with mild winter and/or summer weather and soft
global LNG demand.
The North American oil and gas industry plays a vital role in
the U.S. and global economies. For the industry to prosper financially in a post-shale world in which supply is abundant and costs
continue to decline, bold new action and a sense of urgency are
required, pertaining both to 2016 and longer term.
To ride out the storm in the near term-as everyone in the industry recognizes-it is imperative to conserve cash and reduce
debt. However, it is critical to not repeat the mistake of the past
year and assume that prices will recover quickly. Instead, companies that are not already fully hedged should take seriously the
risk that oil and gas prices could fall even lower and take decisive action to protect cash flows and core assets.
Some companies are still in strong enough positions to survive the crisis primarily by cutting capital expenditures, but many
are not. Numerous companies are considering asset sales. If prices
continue to crater, finding buyers may become increasingly difficult. Distressed debt exchanges, where unsecured debt is exchanged for lower amounts of secured debt, show promise. Here
too, however, timely action is imperative.
❒

Andrew D. Weissman is senior energy adviser at Haynes and Boone LLP, and chief executive
officer and founder of EBW AnalyticsGroup, an energy market analysis service. During his 30year-plus career, Weissman has provided strategic advice and counseling to independent oil and
gas producers, power producers, major electric and gas utilities, hedge funds and energy traders,
retail and wholesale energy marketers, equipment vendors, and large energy users, typically at the
chief executive officer level. He also has played a key role in developing innovative business structures and helping to transform energy and environmental policy at the state and federal levels.
42 THE AMERICAN OIL & GAS REPORTER

American Oil and Gas Reporter - December 2015

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