- While recent, counter-seasonal price spikes have made headlines, the long-term fundamental outlook for US natural gas remains strong.
- For midstream, the expected growth in natural gas production and demand will require additional energy infrastructure, including pipeline and processing capacity.
- The outlook for US LNG has only strengthened given recent geopolitical events, and more LNG projects may be developed in coming years.
With oil prices hovering around $100 per barrel, it may be surprising to investors that growth opportunities for midstream today favor natural gas (and natural gas liquids) over oil. Part of this relates to the ongoing overcapacity for crude pipelines out of the Permian – the most prolific basin in the US – but this also speaks to the wide range of opportunities related to growing natural gas production and demand. A constructive long-term outlook for US liquefied natural gas (LNG) exports, enhanced by recent geopolitical events, adds to the positive macro backdrop. Today’s note provides a brief update on natural gas fundamentals and discusses ways midstream companies are capitalizing on related opportunities.
Near-term natural gas price strength, but long-term outlook also supportive.
While recent, counter-seasonal price spikes have made headlines, the long-term fundamental outlook for US natural gas remains strong. Natural gas prices briefly jumped above $8 per million British thermal unit (MMBtu) intra-day on April 18 and have lately traded around $7/MMBtu, with price support stemming from colder temperatures, strong LNG export demand, and below-average inventories. The price jump is particularly notable given that this is normally the time of year when natural gas prices moderate due to lower demand. Looking past the current strength, the long-term outlook for US natural gas is supported by plentiful resources and growing demand driven by LNG exports, industrial consumption, and power generation. In the reference case of its Annual Energy Outlook 2022, the US Energy Information Administration (EIA) forecasts US natural gas demand will grow through 2050, and production is expected to grow by over 20% from 2021 to 2050.
Growing production + growing demand = growth opportunities for natural gas infrastructure.
For midstream, the expected growth in natural gas production and demand will require additional energy infrastructure. There are various pipeline opportunities, whether its takeaway from the Permian or Haynesville, pipelines to supply LNG export facilities, or additional pipeline capacity to service power plants. Midstream companies are evaluating potential natural gas pipeline projects from the Permian to alleviate a looming bottleneck as production grows. On its recent earnings call, Kinder Morgan (KMI) mentioned that expansions to its Permian Highway (PHP) and Gulf Coast Express (GCX) pipelines through additional compression could add an incremental 1.2 billion cubic feet per day (Bcf/d) of natural gas takeaway combined. The expansions would take 18 months once a final investment decision (FID) is reached. KMI is soliciting interest in the expansion capacity for PHP, having already secured long-term commitment for half of the expansion. MPLX (MPLX) and its partners are expanding Whistler Pipeline by 0.5 Bcf/d, with completion expected in September 2023. While expansions can help in the interim, KMI’s management estimates a newbuild natural gas pipeline from the Permian will be needed in 2026 – a timeline implying that a project would need to reach FID early next year.
Outside of the Permian, there has been notable growth gas production from the Haynesville in East Texas and Northwest Louisiana. The Haynesville’s proximity to the LNG export facilities on the Gulf Coast represents a distinct advantage, despite higher well costs due to deeper targets (compared to the Marcellus for example). ET expects complete construction this year of the Gulf Run natural gas pipeline from the Haynesville, which has a 20-year contract Golden Pass LNG owned by QatarEnergy and ExxonMobil (XOM). Williams (WMB) is developing Louisiana Energy Gateway project to gather up to 2 Bcf/d of responsibly sourced gas from the Haynesville for delivery along the Gulf Coast, including LNG facilities. EPD is expanding Acadian pipeline system in the Haynesville by 0.4 Bcf/d, which is expected to reach completion in 2Q23.
While pipelines are arguably the bread and butter of midstream, these companies also operate the facilities that process natural gas and natural gas liquids (discussed last week). Growing production of natural gas requires more processing plants. Enterprise Products Partners (EPD) announced its recent analyst meeting that it will build new gas processing capacity in the Midland and Delaware Basins of the Permian. Similarly, Energy Transfer (ET) is building Grey Wolf processing plant in the Delaware Basin, which is expected to start up by the end of this year.
Growing natural gas demand for power generation, LNG exports, and industrial applications also creates opportunities for midstream. At its February analyst day, Williams’ management mentioned to supply power plants along its Transco pipeline system. The outlook for US LNG has only strengthened given recent geopolitical events in Europe. The EIA expects demand for US LNG to outpace planned export capacity additions, which should support more projects. The EIA estimates US LNG exports could rise to 16.1 Bcf/d in 2033 from 9.7 Bcf/d in 2021. Energy infrastructure companies focused on LNG exports include Cheniere (LNG), Cheniere Energy Partners (CQP), Tellurian (TELL), and NextDecade Corp (NEXT). Additionally, ET is developing the Lake Charles LNG project (read more), and KMI operates Elba Island LNG facility. Setting aside direct interests in LNG export facilities, midstream companies own and operate the pipeline networks that supply LNG facilities with natural gas (read more).
In the current environment, midstream growth opportunities are biased more towards natural gas and natural gas liquids than oil. A constructive long-term outlook for US natural gas production and demand, including for LNG exports, is supporting midstream investment in additional pipeline and processing capacity.
For more news, information, and strategy, visit the Energy Infrastructure Channel.