By the BF Staff
From the September/October 2016 Issue
Liquefied natural gas (LNG) exports represent the next big breakthrough opportunity for the U.S. natural gas industry. Industry experts believe the United States can simultaneously ramp up LNG exports at a rapid rate while fully satisfying a host of other emerging market needs, with only a minimal impact on energy prices in the domestic market.
As the techniques for shale development have improved, growth in U.S. production has outpaced growth in core U.S. demand, even with a 70 percent reduction in the number of rigs drilling for natural gas over the past five years.
As a result, for more than two years, prices in the day-ahead market at Henry Hub have traded under a $4.50/Mcf ceiling, well below fully loaded break-even costs for many producers. Furthermore, the futures market does not expect this to change anytime soon.
But the United States, once the world’s largest importer of energy resources, is now poised to become the largest LNG exporter in the world. If this unparalleled opportunity is captured, it could trigger five to seven years of unprecedented growth in demand for domestic natural gas, with the potential of an increase of as much as 20 billion-25 billion cubic feet a day by the end of the decade (Figure 2).
This potential for previously unimaginable growth creates a once-in-a-lifetime opportunity for every U.S. producer that controls attractive reserves, raising asset values sharply, and simultaneously providing a huge boost for the service industry. But this opportunity is unlikely to be fully realized unless the industry demonstrates in a powerful manner that the market can absorb increases in demand of this magnitude with only moderate increases in prices for natural gas.
Working natural gas inventories were 3,401 billion cubic feet (Bcf) as of August 26, which is 8% higher than the same time last year. Injections during the refill season have been below the five-year (2011-15) average levels in most weeks because of the high use of natural gas for electricity generation. However, because warm weather last winter left inventories at record-high levels going into the injection season, current natural gas stock levels remain substantially higher than year-ago and five-year-average levels.
EIA’s forecast of total natural gas consumption averages 76.4 Bcf/d in 2016 and 77.1 Bcf/d in 2017, compared with 75.2 Bcf/d in 2015. In 2016, increases in total natural gas consumption are mainly because of electric power sector use of natural gas, which is expected to increase by 5.4%. Forecast natural gas use in the electric power sector declines by 2.3% in 2017, as rising natural gas prices contribute to increasing coal use for electricity generation. Forecast industrial sector consumption of natural gas increases by 2.3% in 2016 and by 1.0% in 2017, as new fertilizer and chemical projects come online.
EIA’s natural gas marketed production in June, the month of the most recent survey data, averaged 77.5 Bcf/d, which is down 2.7 Bcf/d from the record-high daily average production in February 2016. However, more recent preliminary daily data from third-party sources indicate production increased in July and August. EIA forecasts production increases in the second half of 2016 and through 2017 in response to forecast increases in prices and in liquefied natural gas (LNG) exports. Forecast natural gas production rises by 0.6% in 2016 and by 3.0% in 2017.
Natural gas pipeline exports to Mexico have risen in 2016. EIA expects that growth to continue because of growing demand from Mexico’s electric power sector and because of flat natural gas production in Mexico. Gross pipeline exports are expected to increase by 0.7 Bcf/d in 2016 to an average of 5.6 Bcf/d before declining slightly in 2017.
EIA projects that LNG gross exports will rise to an average of 0.5 Bcf/d in 2016, with the startup of Cheniere’s Sabine Pass LNG liquefaction plant in Louisiana, which sent out its first cargo in February 2016. Sabine’s second train is currently in the commissioning process. EIA projects that gross LNG exports will average 1.5 Bcf/d in 2017, as Sabine Pass ramps up capacity.
With expected growth in gross exports, net imports of natural gas decline from 2.6 Bcf/d in 2015 to 0.2 Bcf/d in 2017. The United States is expected to become a net exporter of natural gas beginning in the second quarter of 2017.
The Henry Hub natural gas spot price averaged $2.82/million British thermal units (MMBtu) in August, unchanged from the July average. A hot summer and production declines have put some upward pressure on natural gas prices, although prices remain low enough to support significant natural gas-fired generation. EIA expects natural gas prices to gradually rise through the forecast period. Forecast Henry Hub prices average $2.42/MMBtu in 2016 and $2.87/MMBtu in 2017.
Natural gas futures contracts for December 2016 delivery that were traded during the five-day period ending September 1 averaged $3.18/MMBtu.
LEA COUNTY, NM: ENERGY DIVERSITY
In 2008, Lea County, New Mexico branded itself the EnergyPlex as a way to create brand recognition for an area dedicated to diversification. Lea County encourages and supports growth in all sectors, including oil and gas, bio-fuels, solar, wind, and nuclear development. Through community leadership, corporate cooperation, and the efforts of the Economic Development Corporation of Lea County, it has become an ideal location for new and expanding companies to locate. One of the major focuses of Lea County is its oil and natural gas industry, which has continued to increase since it was discovered many years ago.
Discovered in 1928, Lea County’s oil and gas industry has only grown with over 12,000 active oil wells producing upwards of 73 million barrels of oil, ranking Lea County as the number one producer in the state. In natural gas production, Lea County ranks as one of the top four counties in the state and is served by both Zia Natural Gas Company and New Mexico Gas Company. In 2015, Lea County produced over 226 million MCF of natural gas, 32 million more than the previous year. Lea County’s production and industry continue to grow with expansions of companies such as Agave Energy. Agave Energy, a longtime Lea County business, announced in late 2015 of their plan to expand their natural gas processing facility in Lea County. This expanded facility will provide up to 700 jobs through both permanent positions and construction jobs. Currently the facility processes 95 million cubic feet of gas per day. The expansion could increase that number to 235 million cubic feet.
The Agave Energy expansion took advantage of Lea County’s Industrial Revenue Bond (IRB) incentives, aimed to help companies locate in Lea County through property tax and gross receipts (sales) tax abatements. Along with IRBs, Lea County also participates in the state’s Local Economic Development Act (LEDA) program, which can provide additional funds. In addition, New Mexico has some of the lowest property tax rates in the nation and no inventory tax. Along with local incentives, New Mexico Junior College in Hobbs works with many local industries to create specific training courses to provide a skilled labor force as needed. These courses can be offered through the state Job Training Incentive Program, which reimburses the employer 50-75 percent of employee wages and the cost of custom training at a public institution.
Along with incentives, Lea County offers an abundance of land for companies looking to move operations within its communities. The EnergyPlex Park, Lea County’s largest industrial park, features 10,000 acres for development and the added bonus of being located near Hobbs, Lea County’s largest city. Lea County has grown significantly within the past few years; the population has increased more than 20 percent since the 2000 census. Hobbs was ranked the 7th fastest growing micro-city in America by the US Census bureau in 2014. The past few years has seen growth in all sectors in Lea County with a number of new restaurants opening, along with new housing being constructed, community improvement projects launched, and progress made on many new industrial projects.
An ideal location in Southern New Mexico, located close to West Texas, Lea County offers the convenience of Lea County Regional Airport, with United Airlines flights daily from Hobbs to Houston, four U.S. highways as well as rail transportation, 330 days of sunshine, and a temperate climate. The EnergyPlex’s abundance of land and minimal inclement weather makes it ideal for any industrial project. With these benefits, Lea County has successfully diversified the EnergyPlex with companies such as URENCO USA, Waste Isolation Pilot Plant, and wind projects such as AKUO energy and Wildcat Wind.
With a proven track record in diversification, including natural gas production, nuclear energy, oil production, and renewable energy projects, the EnergyPlex looks to the future and attracting a larger variety of industries that will keep Lea County’s economy thriving for many years to come. Lea County’s dedication to hard work, collaboration, and cooperation, make it the ideal place to live, work, and play. For more information, visit us at EDCLC.org.