US natural gas: so hot right now

One thing to start:

Welcome back to Energy Source. I am back in New York after a brief stint across the Atlantic — and straight into a busy week on the energy front.

Big Oil continues to rake it in, with BP this week becoming the latest supermajor to report bumper profits, notching its best quarter in 14 years. Chief executive Bernard Looney made it clear a reduction in fuel costs was not on the cards.

The US shale patch is also continuing to ride the wave of high prices and resist the urge to return to growth. Drillers from Pioneer to Diamondback have reported huge profit hauls.

But it is the increasingly bright prospects for US natural gas that are in the spotlight in today’s newsletter after shale pioneer Chesapeake decided to go all-in on the commodity, abandoning oil.

In Data Drill, Amanda looks at the soaring risk of flooding as climate change pushes sea levels ever higher. America’s energy exporting heartlands are first in the line of fire.

Thanks for reading.

Myles

‘Different company, different world’: Chesapeake goes all-in on gas

Even at $100 a barrel, oil is so last season.

That is the case for Chesapeake Energy at least. The rock star of the shale revolution this week decided it was returning to its roots, ditching its crude assets and doubling down on natural gas.

Once America’s best-known fracker, Chesapeake is no longer the heavy-hitter it once was — when it was valued at more than $35bn and its chief executive boasted the biggest pay packet of any boss on Wall Street.

But that the company most closely associated with the ups and downs of the volatile US shale patch is going all-in on gas underlines the bright future the sector sees ahead of it.

As Piper Sandler analysts put it in a note this week, for now at least “gas is good”.

Then . . . 

That was not the case a little over a year and a half ago.

In the autumn of 2020, while Chesapeake was in the throes of bankruptcy proceedings after the coronavirus pandemic-led crash proved the final straw in its fall from grace, America’s natural gas industry seemed to be in the middle of an existential crisis.

The prospects for liquefied natural gas exports were looking bleak after a $7bn contract to supply French utility Engie went down the tubes on concerns over the emissions profile of American gas.

At home, the US had just elected a president in Joe Biden who was openly hostile to a sector he helped to flourish as vice-president in the administration of Barack Obama.

And pundits were questioning whether America would ever complete another big pipeline project after the 600 mile Atlantic Coast conduit, due to funnel natural gas from West Virginia to North Carolina, was abandoned after heavy resistance, despite an $8bn investment.

. . . and now

The picture has changed dramatically.

On the export front, Europe, in the middle of an energy crisis, is hoovering up American LNG. Concerns about emissions seem long-since forgotten. In the first four months of the year, the US exported 11.5bn cu ft/d of gas in the form of LNG — three-quarters of which went to Europe. Brussels has pledged to ratchet up that figure by the end of the decade.

There is also huge opportunity in Asia, where LNG demand is set to quadruple to 44bn cu ft/d by 2050, according to a report released this week by think-tank the Progressive Policy Institute.

“I’ve never been more excited about the future,” Toby Rice, chief executive of EQT, told me recently, as he outlined his ambition to increase US LNG exports to 55bn cu ft/d by the end of the decade.

“Europe’s newfound desire to wean itself off Russia has amplified the [shift in sentiment that was emerging before the war] and spells a bright medium-term future for the US LNG sector,” wrote Piper Sandler’s Jan Stuart in a note this week.

But even domestically things look set to be tight this winter, with hot summer weather and high power generation demand sucking up supplies and leaving storage precariously low. Rising LNG exports are also helping drain inventories and prop up prices.

Piper Sandler believes US storage is on track to fill just 3.4tn cu ft of gas by the time winter arrives — short of the 3.8tn buffer usually needed to see the country through a cold winter heating season. That could send already-elevated domestic gas prices sharply higher in the coming months.

And things have also improved on the pipeline front. West Virginia senator Joe Manchin said this week he had secured a commitment from Biden and other senior Democrats to push the long-delayed Mountain Valley Pipeline over the finish line. That would allow for an increase in production from the Marcellus and Utica basins, long held back by a lack of options to pipe it out.

‘A different world’

Chesapeake chief executive Nick Dell’Osso was clear this week that the decision to shift out of oil — offloading its assets in south Texas’s Eagle Ford basin — was driven primarily by an assessment of which assets could deliver the best returns.

“[It is] not a gas versus oil commodity decision,” he told me. “This is about asset returns and asset strength.”

The company has had more success driving down costs and improving efficiency in its gas assets in Louisiana’s Haynesville and the Marcellus in Appalachia, he said. So it made more sense to focus there.

But Chesapeake’s move, and the timing of it, nonetheless speaks to the bright spot in which US natural gas now finds itself. Those returns might not look so good if natural gas prices were still at $2/mmbtu.

“It is a different world and we are a different company,” said Dell’Osso.

“We are really encouraged with the macroenvironment for natural gas. We think that we are in a constructive macroeconomic environment for natural gas for an extended period of time.”

(Myles McCormick)

Data Drill

By 2050, much of the US Gulf coastline — the heart of the country’s oil and gas industry and hub of the global fossil fuel trade — could spend nearly half the year underwater, says a new outlook by the National Oceanic and Atmospheric Administration.

Since 2000, Corpus Christi has seen high-tide flood events increase 300 per cent, according to the NOAA. The city is the largest crude export hub in the country and home to six refineries. Its liquefied natural gas terminal shipped 712bn cubic feet of LNG last year, only second behind Sabine Pass, according to the Energy Information Administration.

Big east coast cities such as New York, Boston and Washington could also face floods for nearly a fifth of the year.

Curbing future emissions can help mitigate coastal flooding, says the NOAA. While past emissions are responsible for a two-foot sea level rise by the end of the century, failing to curb future emissions could add an additional 1.5-5 feet of water.

(Amanda Chu)

Power Points

• IMF says European countries should pass energy costs on to consumers to save power and encourage switching from fossil fuels.

• Madagascar is facing the first climate-change-induced famine, says the UN. What’s happening there could serve as a harbinger for communities everywhere.

• Opinion: warming temperatures expose divisions in the labour force.

• Disappearing snow is worsening the west’s historic drought and threatening to upend millions of lives. (Bloomberg)