U.S. Gas Boom Needs $170 Billion for New Pipelines, with New Investment Risks Looming
The U.S. natural gas industry is running into a choice between untenable options: spend a mind-bending US$170 billion on pipelines, compressor stations, export terminals, and other infrastructure over the next seven years, or risk losing momentum on a shale gas production boom that has roiled global oil and gas markets and driven the country’s dreams of energy “dominance”.
The U.S. Energy Information Administration (EIA) foresees the country’s natural gas production growing by 24 billion cubic feet, or 32%, from 2017 to 2025. But “one threat to the U.S. being able to export [liquefied natural gas] and expand its export capability is the overall commitment to invest in infrastructure to move natural gas,” said Meg Gentle, CEO of gas exporter Tellurian Inc.
Like this story? Subscribe to The Energy Mix and never miss an edition of our free e-digest.
“It’s a warning that, for parts of the country, the pipeline woes aren’t over yet,” Bloomberg notes. “Appalachian producers have been grappling for the better part of the shale boom of the past decade with limited pipeline access.” And “the Permian Basin, known for its oil-rich layers of rock, is facing the threat of having to slow down the output of crude because drillers lack capacity to handle all the gas that’s flowing as a mere byproduct.”
But while fossil analysts see little political opposition to new natural gas infrastructure in West Texas, other news reports point to a mounting list of obstacles—beginning with investors who are becoming jaded about the expenses exploration and production (E&P) companies incur to get shale oil and gas out of the ground.
“Investors are taking a wait-and-see attitude toward the stocks of the top U.S. shale oil and gas drillers and are unsure if those companies will keep spending under control as the price of oil goes higher,” Standard & Poors Global Market Intelligence reports this week, noting that nearly half of the 22 companies covered in a recent analysis are looking ahead to double-digit percentage spending increases this year.
That’s capturing the attention of analysts like Michael Scialla of Stifel Nicolaus & Co., who warned late last month that the 22 stocks lost 3% over their value in the year ending April 10, a period when the S&P 500 gained 13%. He warned that “E&P stocks underperformed the broader market and oil prices,” extending a trend already established over a two-year period, with the majority of companies spending more than investors would have preferred.
“E&Ps have a long history of out-spending (including the last three years),” said Barclays oilfield services analyst William Thompson, although “a behavioural shift may be in store, since investor demands for higher returns really hit a fever pitch last September.”
On Resilience.org, veteran fossil analyst David Hughes points to a more fundamental problem that undercuts the EIA’s “remarkably optimistic” projections for the sector—and could ultimately drive shale companies to hike spending in an effort to squeeze more oil and gas out of their wells.
The EIA “projects that shale gas production will be 130% higher in 2050 than in 2016, while tight oil production will grow by 74%, all at relatively low prices,” Hughes writes. “This despite the fact that average production from individual wells falls 70 to 90% in the first three years and entire fields would decline 20 to 40% a year if new wells weren’t constantly drilled.”
Which means that, to keep up with their past expenditures and fill $170 billion worth of new pipelines and assorted infrastructure, shale producers would have to keep pouring money into new wells, while their investors watch out for any sign of them abandoning what Thompson calls “the capital discipline mantra”.
After reviewing the same well production database the EIA uses in its analysis, Hughes concludes that the Trump administration agency “has overestimated the likely future production of shale gas and tight oil for most plays by a wide margin. This is a result of overestimating the size of the prospective area and hence the number of wells that can be drilled, and underestimating future declines in well productivity.” He adds that the EIA’s estimates are “much higher than those of the U.S. Geological Survey and the University of Texas Bureau of Economic Geology.”
Yet the EIA’s figures still have the aura of official truth, even though Hughes finds the results “baffling and worrisome. It’s one thing for industry to paint a rosy picture of future production, but something altogether different when a government agency—tasked with providing the American public with objective information—does it.”
The other threat on the horizon for shale producers is the plummeting cost of renewable energy and energy storage. “Plentiful and relatively inexpensive as a result of the nation’s fracking boom,” natural gas “has been portrayed as a bridge to an era in which alternative energy would take primacy,” the New York Times reports. “But technology and economics have carved a different, shorter pathway that has bypassed the broad need for some fossil fuel plants.”
As cleaner, less expensive alternatives take hold, “some utility companies have scrapped plans for new natural gas plants in favour of wind and solar sources that have become cheaper and easier to install,” the Times notes. “Existing gas plants are being shut because their economics are no longer attractive. And regulators are increasingly challenging the plans of companies determined to move forward with new natural gas plants.”
“It’s a very different world that we’re arriving at very quickly,” said Portland, Oregon energy consultant Robert McCullough. “That wind farm can literally be put on a train and brought online within a year. It’s moving so fast that even critics of the old path like myself have been taken by surprise.”