Between a Rock and a Hard Place

We are big believers that in life the only constant is change. The constantly changing dynamics of the energy industry is a great example of this. Henry Hub hitting $8, Natural gas producers demonstrating capital discipline, a Democratic president requesting more fossil fuel production, the impact of the Russian/Ukrainian conflict on global markets, etc.?

RBAC’s 22Q1 outlook discusses their ripple effects felt in North America for months. LNG facilities are operating at near record levels and with more LNG facilities gaining FIDs every day, the proportion of exports to domestic load will continue to grow. The greater utilization of LNG has blended the North American Market into the constantly evolving global market, demonstrating the need for a robust understanding of both the domestic market and the impact of global influences.

The figure 1 below shows in RBAC’s latest outlook, the growth of both pipeline and LNG exports out of North America.

Figure 1: Natural Gas Exports vs. Domestic Consumption in Bcf/d

Source: Short-Term Energy Outlook – U.S. Energy Information Administration (EIA)

There are pros and cons to increased participation in the global market.

The cons, from the North American consumers’ perspective, being increased energy costs for end use consumers, price inflation in goods produced by energy intensive processes, and sensitivity to global events. Increased baseload demand for LNG pushes the natural gas supply chain up against capacity constraints, limiting producers’ ability to ramp up in times of increased heating demand or in response to higher prices.  As record inflation squeezes all of us, we must ask, “Should Federal, State, and Local governments continue to obstruct desperately needed energy infrastructure projects?”  And “How could a relaxed regulatory environment affect pricing and benefit consumers?”  These are some of the hard-hitting questions we hope to answer with RBAC’s GPCM® Market Simulator for North American Gas and LNG™.[1]

Figure 2 below shows world coal consumption has reduced in the EU and United States but has remained constant in most countries while in China and India there has been a significant increase.

Figure 2: World Coal Consumption (in Petajoules)

The pros of increasing North American LNG exports include reduced global emissions as coal fired generation is replaced by cleaner burning natural gas as well as cheaper prices and energy security for our allies abroad. Pennsylvania and Ohio are the perfect examples of carbon emissions reductions resulting from coal to gas switching because of the availability of cheap clean burning natural gas.  Perhaps, of even more importance, is energy security. With Russia no longer being a suitable source of oil and gas for European markets, the United States has gotten stuck between a rock and a hard place. Choosing between the current energy transition plan or supporting our allies abroad by supplying desperately needed LNG. 

Does our government continue to inhibit pipeline expansion when it’s constituents and allies need access to cheap natural gas? How can we incentivize producers to drill when they’ve been stymied by inflation and policies that advocate a decidedly gas-prohibitive agenda? 

As you can see in figure 3 below, rig counts have been increasing steadily since falling off a cliff due to the pandemic slowdown; however, given the current price environment of near $8 gas and $100 oil, one would expect dramatic increases in activity, especially given the reliance and reduction of DUCs during the pandemic. But inflation and supply chain woes have plagued the energy industry which further constrains gas supply. Jamie Small, president of Element Petroleum III was quoted in the Wall Street Journal saying, “If someone walked in and put a pile of money on the table and said, ‘Drill me a well next week,’ it isn’t going to happen.” Much of the rig count growth is occurring in the oil-rich Permian and the Haynesville Shales, driven by favorable economics and proximity to LNG export facilities.

Figure 3: Rig Count by Basin and Type

Source:, RBAC Visual Analytics

The Permian growth could be attributed to rebuilding of DUC inventory in that play. As seen below, Permian DUCs were relied upon quite heavily during the pandemic, dropping from 3,610 in July 2020 to 1,309 by March 2022 almost 1/3 of their previous highs.  Eagle Ford DUCs experience a similar if less dramatic reduction, from 1381 down to 642 over the same time frame.  

Figure 4: DUC Count by Basin