Natural Gas Market: Strengthening Foundations for Long-Term Growth
The dominant sentiment within the natural gas industry is that the current low price environment is likely here to stay. Throughout the value chain, industry players who were once awaiting a market recovery are now taking a different, but more holistic, view on planning for the future: a view that is focused on optimizing current assets, rightsizing workforces and incorporating cost-cutting measures.
The 2017 Strategic Directions: Natural Gas Industry Report survey found that low gas prices and price stability were among the top five issues and/or challenges related to the natural gas market, along with economic/demand growth, gas supply reliability, environmental regulation, and rate and regulatory certainty.
In this year’s survey, one of the most dramatic shifts from previous years is the expectation for global crude oil prices between now and 2020. Of natural gas industry respondents, nearly half expect prices to be between $40 to $50 per barrel. This is in stark contrast to 2016 results, where only 7 percent listed this price range as their expectation. Last year, more than half of survey participants indicated their expectations for crude oil prices to be between $51 and $70 per barrel. In another striking contrast, whereas about a quarter of the respondents in 2016 indicated price expectations above $70 per barrel, less than 2 percent of respondents indicated this level of optimism about crude oil prices in 2017.
One significant factor affecting industry expectations of oil prices stems from the effect, or lack thereof, of production quota cuts implemented by the Organization of the Petroleum Exporting Countries (OPEC). OPEC’s low cost of production and significant spare capacity historically have allowed it to be effective in moderating crude oil price movements. In last year’s report, more than one-third (38 percent) of industry respondents indicated that OPEC strategy would have the most effect on oil prices between 2016 and 2018, signaling the perceived importance then of OPEC’s influence on prices.
In late 2016 through this year, OPEC member countries came to an agreement to undertake supply cuts in an effort to rebalance the market and support higher prices. After a period of sustaining their production at high levels to protect market share which saw crude oil prices plummeting below $30 per barrel, the cartel’s agreement to curb production was considered an important measure to bolster prices.
However, U.S. shale oil producers who survived the price crash of 2014 made significant technological and process investments, lowering their marginal cost of supply. As prices initially rose with OPEC’s production cuts and stabilized in the $50 to $55 per barrel range, these U.S. shale producers ramped up their drilling programs and rapidly increased supply, diminishing the impact of OPEC’s production cuts and curtailing any further price increases.
Given this fundamental market shift driven by the availability of significant supply of U.S. shale oil resources and lower prices, OPEC’s control of market supply and its ability to sustain higher oil prices has been greatly weakened.
Maximizing Assets, Minimizing Costs
With prices not expected to change drastically in the coming years, organizations throughout the oil and gas value chain are being tasked with creating long-term strategies for managing operations in a challenging environment. Industry leaders are focusing on finding operational efficiencies, divesting noncore assets and comprehensively strengthening their organizational foundations.
Several producers are looking to cut costs by divesting upstream assets and reducing exploratory functions that are not directly tied to growth strategies. Devon Energy, an independent natural gas, natural gas liquids and petroleum producer, for example, recently announced plans to divest $1 billion in assets “to further strengthen its investment-grade financial position.”
Maximizing performance from current assets was listed by 65 percent of survey respondents as the highest priority within organizations to maintain stable earnings. Solid asset management strategies increasingly are a focus area facilitating longterm efficiency, safety and cost reduction. Asset data analytics, for example, is allowing operators to automate and optimize asset maintenance and reduce redundancies. As many firms look to streamline their workforces, automation also can help consolidate roles and responsibilities that were once only performed manually.
While asset performance monitoring is helping to decrease operational costs, one of the key drivers for adopting smart technologies is safety which, for the sixth year in a row, was named the most important issue for the natural gas industry overall. The natural gas industry faces increasing regulatory pressure driven by safety concerns to monitor and manage its assets. The dynamic social and business climate of the 21st century means effective decision-making will increasingly rely on asset intelligence. Historically poor recordkeeping and inconsistent quality of asset data cannot meet the challenge.
Regulators, both on the federal and local levels, now are mandating the types of data on natural gas-related assets that need to be collected and analyzed. To comply with regulations and increase transparency, natural gas companies require flexible asset data acquisition and management solutions designed to supplement, rather than replace, current company systems and provide actionable intelligence on asset performance.
Different Market Segments, Different Priorities
While management of existing assets remains top of mind, new natural gas infrastructure continues to be vital, and nearly three-quarters (72 percent) of survey respondents selected pipeline capacity as one of the most critical infrastructure investments necessary for market growth. When broken down by respondent type, 84 percent of local distribution companies named pipeline capacity a critical investment, along with 71 percent of natural gas organizations (intrastate/interstate pipelines, natural gas processors and producers), signaling the continued need to move growing supply to enduse consumers. Infrastructure to support growing natural gas demand in Mexico or for moving increasing supply from the Marcellus and Utica shale resources in Pennsylvania and Ohio, for example, are essential for continued growth.
It’s important to note the different perspectives according to where respondents operate in the value chain. Not surprisingly, upstream investments are a higher priority to oil producers. More than half indicated that these were critical investments; over 10 percent more than respondents from any other market segment. While midstream and downstream players may not see these investments as a priority, investments from the private sector in exploration and production will continue to be vital to the market’s long-term growth.
Global Liquefied Natural Gas (LNG) Trade Reshaping Market
The United States’ budding role as a major producer is reshaping global natural gas trade. In fact, the global market seems to be relying on continued U.S. gas production and exports, with survey responses indicating that U.S. shale gas production, North American LNG liquefaction capability and U.S. fuel conversions to natural gas could be major forces impacting natural gas prices in the coming years.
Thirty-eight percent of industry participants named the emerging U.S. role as a major LNG supplier as the most prominent trend extremely likely to shape the global LNG market over the next five years. Contributing factors to this outlook include the relatively low cost of the country’s supply and the increasing volume of spot LNG on the market from U.S. producers. The rise in spot LNG on the market is advantageous for buyers because those locked into long-term contracts are pushing suppliers to renegotiate contract terms and lower prices. India’s Petronet LNG is a recent benefactor of this trend, renegotiating in September a historic price reduction in its LNG agreement with ExxonMobil.
Industry views on which factors affect natural gas prices echo the ebbs and flows of recent years’ dynamics. Global LNG liquefaction capability, U.S. and global economic growth, geopolitical gas supply disruptions, and exports to South American and Latin American countries, according to survey respondents, all could have a much more significant impact on the market between 2019 and 2025, signaling that firms are preparing for the continued shift toward globalization and interconnectedness of the natural gas market.
Throughout the industry, one theme prevails. Long-term planning has shifted from reacting to an impending natural gas price rebound to a more proactive, comprehensive view of planning for future growth assuming availability of supply and sustained lower price levels.