American Oil and Gas Reporter - June 2022 - 30

SpecialReport: PowerGen And LNG
Power Generation Sector
Outpaces Booming LNG Exports
To Lead U.S. Gas Demand Growth
By Sheetal Nasta
HOUSTON-Long before Russia
launched an invasion of Ukraine, international
natural gas benchmark prices
were very clearly and very loudly signaling
a sea change in supply and demand fundamentals.
Driven by supply-side tightness
and dwindling inventories, European and
Asian spot prices gathered major momentum
in late-winter and spring of 2021,
pushing regional benchmark prices to
all-time highs.
Yet, throughout the first six months
of 2021, prices in the well-supplied U.S.
gas market remained largely disconnected
from the growing upside price volatility
at international pricing hubs. That began
to change late last summer, when Henry
Hub prices jumped from an average of
$2.71 an MMBtu in January to average
$5.51/MMBtu in October. Even before
the start of last winter, pricing had climbed
to a new level.
With the European Union imposing
sanctions on Russian supplies, a western
European market that had become dependent
on the flow of imports from
the east now is in a mad scramble to
offset the huge lost supply volumes.
The world is looking principally to U.S.
liquefied natural gas exports to help fill
the growing supply-demand gap, tightening
the linkage between prices in supply-short
global markets and prices in
the domestic gas market.
There is no doubt that much of the
run-up in natural gas futures prices is
tied to the strained global LNG market
and strong demand for U.S. LNG exports.
Consequently, even with stable U.S. production
(although it has not returned to
the pre-pandemic high of 96.2 billion
cubic feet a day in November 2019) and
a heating season that was a virtual noshow
through much of the winter, domestic
storge inventories fell to their lowest
30 THE AMERICAN OIL & GAS REPORTER
levels in three years by the end of the
heating season. By the third week of
May-a time of year when prices are typically
in a seasonal lull-all of these factors
resulted in natural gas for July and August
delivery trading above $9.00/MMBtu on
the New York Mercantile Exchange for
the first time in more than a decade.
Certainly, robust LNG exports contributed
to tighter U.S. supply-demand
balances during the November-March
withdrawal season and have continued
to spur bullish price action this spring.
LNG export terminals ran full tilt this
winter and feed gas deliveries posted unprecedented
highs, as new liquefaction
capacity was commissioned and the
Ukraine war threatened energy security
in Europe and heated up global competition
for U.S. cargoes. Going forward,
LNG exports are projected to maintain
their historic clip near 12 Bcf/d.
Top Demand Driver
However, a look at winter-on-winter
changes in the Lower-48 supply and demand
balance reveals that the biggest demand
growth driver has been domestic
FIGURE 1
Lower-48 Power Burn
25
30
20
15
10
5
2016-17
2017-18
2018-19
2019-20
2020-21
2021-22
consumption in the primary sectors: industrial,
residential/commercial heating,
and most of all, power generation. The
power sector accounted for 44% of the
5.4 Bcf/d year-on-year increase in total
Lower-48 demand, including LNG feed
gas/exports, which came in second at 32%.
So, despite the highest natural gas futures
prices in more than a decade, gas
consumption for U.S. power generation
is setting records. RBN Energy's NATGAS
Billboard models estimate that power
burn averaged a record 29.2 Bcf/d last
winter (Figure 1), with November at the
highest level for that month and January
eclipsing any winter month at 31.6 Bcf/d.
Through April, power burn continued to
set a record pace and had accounted for
more than 50% of the total demand growth
from the same period last year.
This is, in part, by design: Economics
and environmental regulation broadly
favor gas-fired plants and have pushed
into retirement hundreds of coal-fired
plants during the past decade, reducing
price-driven fuel-switching capabilities
between the two fuels. However, there is
more to it than that: A tight coal market,
Bcf/d
American Oil and Gas Reporter - June 2022

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