Shale gas from the USA cannot help Europe

If there is one country that could have saved Europe from its energy crisis, it is the US - home to huge shale gas fields with seemingly infinite supplies of natural gas and gigantic terminals capable of supplying the gas liquefy and transport abroad.

However, US shale gas has been unable to bail Europe out for a variety of reasons. US inventories have not been replenished as much as usual in recent months after summer heat waves soared energy demand and post-pandemic industrial recovery diverted fuel to power plants and factories. Meanwhile, many large shale drills have been siphoning off money to their shareholders and focusing on climate goals rather than increasing production.

The result is that there is only a very small cushion of supply in the USA, and whatever is available for export as liquefied gas will be fought over - not only by desperate European importers, but also by buyers in Asia who themselves have a Struggling with energy crisis and willing to pay an extra charge.

This reality is starkly different from recent years, when there has been a steady domestic surplus and the government has tried to promote exports as "molecules of American freedom". Americans are likely to face some of the highest energy bills in years. Gas futures traded in New York have more than doubled so far in 2021, and the season of highest demand has not even started. The US benchmark price soared to a seven-year high this week and could more than double in the next few months, according to market research firm BTU Analytics. In theory, the US is the Saudi Arabia of natural gas, but the reality is that no new gas is coming online, "said Campbell Faulkner, chief data officer at OTC Global Holdings LP, who previously worked in risk management and analysis at Royal Dutch Shell (LON: RDSa) Plc and JPMorgan Chase & Co. (NYSE: JPM) "These awards show how concerned people are about not having enough gas. Europe is an example of what could happen if catastrophic supply shortages result in record prices, widespread business failures occur in the UK electricity market, and the continent's largest chemical producer, BASF SE (OTC: BASFY), cuts production because its raw material costs drop in Skyrocketing. And of course, the sustained hikes in energy prices are adding to inflation concerns and adding to the rising raw material costs that companies are already bearing.

New York natural gas futures are well on their way to their steepest annual surge since 2000 when an early winter sparked massive consumption while domestic energy production stagnated. In that year, prices more than quadrupled. Over the next two decades, shale gas extraction techniques continued to evolve, opening up vast new resources and making the United States a global exporter. Manufacturers of plastics, fertilizers, and other gas-derived products took advantage of the flood of cheap, reliable shale gas and spent billions of dollars building or expanding production facilities. At the same time, climate-conscious regulators, activists and investors pushed for the closure of much of the country's coal-fired power plants, inadvertently increasing the grid's reliance on gas-fired generators. "The mood has changed dramatically among executives in the US shale gas industry, away from production growth and towards shareholder returns and ESG initiatives," said Connor McLean, an analyst at BTU, in an interview, referring to environmental, social and governance Goals. The gas reserves in underground salt caverns and depleted aquifers in the USA - an important source of fuel to supplement the pipeline supply during the demand peaks in the winter months - are, according to the research company Vortexa Ltd. 21% below the ten year average for this time of year. This explains why prices in the US are skyrocketing. On the New York Mercantile Exchange, the price of gas for deliveries jumped 11% on Monday in October, surpassing the $ 5.50 per million British Thermal mark for the first time since early 2014, when the polar vortex shrouded much of the United States in record-breaking cold Units. Prices for December through February deliveries were even higher, reflecting traders' concern about the supply situation.

Prices have already skyrocketed in California, which is facing a number of unique challenges including the scarcity of hydropower and the summer demand for electricity to run air conditioning. According to data from OTC Global Holdings LP, gas prices on the Southern California border reached $ 7.40 last week, while in the Los Angeles area it was nearly $ 11.

As the Energy Information Administration announced on September 8th, gas production in the US is expected to increase by only 1.1% in the second half of the year compared to the first six months. Both the residential, commercial and industrial sectors will consume more gas this year than they did last year, although aggregate demand could decline 0.9% as rising fuel prices prompt some power producers to switch to coal, so the EIA. READ MORE: Europe's Energy Crisis Affects the Rest of the World Even if an unexpected period of mild weather releases some U.S. shipments in the coming months, gas exporters will almost certainly avoid Europe and instead ship those shipments to Asia, where prices are higher. said Anna Mikulska, an energy student at Rice University's Baker Institute of Public Policy in Houston.

Europe cannot rely on the US for gas supply this winter, "said BTU's McLean.

''Winning the arbitrage''

As unsettling as the $ 7.40 gas price is for US buyers, prices in Europe and Asia are many times higher: a key gas import benchmark for Japan and Korea is approaching $ 30 while fuel is in Europe costs the equivalent of 25 dollars.

Citigroup Inc. (NYSE: C). warned prices could hit $ 100 in the final three months of the year as power generators, utilities and manufacturers compete for supplies across the northern hemisphere. That's more than double the bank's previous forecast.

These regional price shifts also explain why the excess gas that American drilling companies can still extract this winter is likely to be transported to Asia by liquefied gas tankers rather than staying at home or crossing the Atlantic to Europe.

"Asia is the winner of the arbitrage," said Mikulska of Rice University. READ MORE: Energy crisis puts the world's most ambitious climate plan to the test

On the supply side, drilling companies have not responded to this year's price hikes with increased investment in new North American deposits, as they secured the majority of their expected production in 2021 earlier this year, tying them to selling supplies at lower prices, according to Raoul LeBlanc , North American Shale Gas Analyst at IHS Markit Ltd.

Management teams also have little incentive to ramp up production after pressure from investors to focus on financial returns and deleveraging prompted boards of directors to remove production-related metrics from compensation packages, BTU's McLean said.

"The shareholders have made it very clear that the money is theirs and they don't want them to spend it on expanding the offering," said LeBlanc.

There are also temporal and physical obstacles: anyone who sets up an oil rig today and starts drilling a gas well cannot realistically hope that fuel will flow in five or six months - or longer, depending on the country. And with the domestic liquefaction plants preparing the gas for shipping overseas already at almost full capacity, there is no room to export more fuel, even if there were supplies, said Sindre Knutsson, vice president of markets at Rystad Energy .

"Gas producers looking at the strong forward curve really don't have time to start up new supplies before the end of winter," said Jen Snyder, managing director of research company Enverus.