Where is the energy industry headed? For once, right or wrong, most operators and analysts have a definite view on the industry’s near-term future. That’s especially true in the United States, which has been hit by two big recent jolts.
First, industry consolidation went into overdrive, mostly affecting Permian Basin holdings. The buying spree culminated last year in two super-deals, Exxon Mobil’s $60 billion bid for Pioneer Natural Resources and Chevron’s $53 billion merger with Hess.
Second, U.S. natural gas spot prices nosedived in a big way. By March, the average Henry Hub spot price had dropped by more than half since the beginning of the year, to $1.49 per million BTU, according to the Energy Information Agency. Gas prices then rebounded but stayed below $2.
‘Gas is Global’
This year brought even more consolidation spending, most notably the $26 billion Diamondback Energy-Endeavour Energy Resources deal announced in February. Action then spread into natural gas and the midstream sector, including the $7.4 billion Chesapeake Energy-Southwestern Energy merger.
Today, the industry consensus predicts consolidation will continue in U.S. unconventionals and the midstream sector. And by a significant majority, operators expect U.S. spot gas prices to return to $2.50/MMBtu or more – despite the EIA forecasting “natural gas inventories to remain relatively high and natural gas spot prices to remain relatively low through 2025.”
Brandon Myers, head of research for energy analytics firm Novi Labs in Calgary, sees the U.S. gas industry going into transition. LNG production and shipments are opening new markets and expanding demand for domestic gas production.
“If you look back at the Chesapeake-Southwestern Energy deal, one of the things they said is, ‘We’re building a globally relevant gas company.’ That’s the theme,” Myers noted.
“A cool tagline is, ‘Gas is Global,’” he said.
The United States became the world’s largest LNG exporter in 2022. Last year, U.S. LNG exports averaged 11.9 billion cubic feet per day, the EIA reported, and capacity could increase by 9.7 billion cubic feet per day over the next three years. That is reshaping gas demand.
“Strategically, I think you are going to see a bifurcation of gas operators in the U.S. First, those companies with a marketing team that can get their gas to advantaged markets. Then second, those who can’t,” Myers said.
“If you aren’t going to integrate and get your gas to better markets than in-basin hubs, you will need exceptional rock quality in order to entice investors. You can’t tie into an international LNG market if you’re a local operator,” he observed.
That also portends a reshaping of the U.S. gas sector. And it opens the door for more consolidation, in shale gas and across U.S. upstream.
‘A Historic Consolidation’
“In the short to medium term, the low gas-price forecast will hinder (mergers and acquisitions), but in the long term it needs to happen,” Myers said.
“You could start to see things pick up in the back half of the year and pick up more into 2025,” he said.
Last year, oil and gas exploration and production companies increased spending on mergers and acquisitions to $234 billion, “the most in real 2023 dollars since 2012,” the EIA reported.
“Oil and gas is undergoing a historic consolidation wave comparable to what occurred in the late 1990s and early 2000s giving rise to the modern supermajors,” said Andrew Dittmar, senior vice president at energy information and software company Enverus.
“After a decade of lowered investment in exploration and with the major U.S. shale plays largely defined, M&A has become the preferred tool to replace declining reserves and secure longevity in these companies’ profitable upstream businesses. For the best quality resource, there are also now more buyers than sellers, driving prices upward,” he noted.
In a report on the consolidation activity, Enverus forecast that “2024 may return to a higher flow of smaller, asset-sized transactions across a wider distribution of plays.” Areas that may see an uptick in deals include the South Central Oklahoma Oil Province and Sooner Trend Anadarko Canadian Kingfisher (or SCOOP-STACK) in Oklahoma, the Eagle Ford in Texas and North Dakota’s Bakken shale, it predicted.
Industry consolidation spread to the midstream sector last year, including ONEOK’s $18.8 billion buyout of Magellan Midstream Partners. In January of this year, Sonoco announced it would acquire terminal and pipeline operator NuStar Energy in a transaction valued at $7.3 billion.
Demand Growth for Gas
Continued high prices for oil production are boosting the industry’s appetite for acquisitions. Starting last October with the Israel-Hamas war, analysts generally expected geopolitical tensions to keep world crude prices at high levels, possibly pushing them toward $100 a barrel.
By contrast, natural gas prices have been much softer than expected. But many producers expect a bounce-back, with a return to spot prices in the $2.50-$3/MMBtu range.
“Operators are betting on that, and they’re positioning themselves for plays that might not break even today at or below $2,” Myers said.
Price optimism for U.S. gas comes from LNG-related demand and, in part, forecasts for power-generation demand. Current total U.S. dry gas supply averages around 106 Bcf/d, according to the EIA. Many analysts see demand increasing by 10-15 Bcf/d during the next few years, and Myers thinks it could go even higher.
“The growth in (U.S.) gas demand by the end of the decade could be over 15 Bcf/day. There will be winners and losers, there,” Myers observed.
He sees three themes dominating the domestic gas scene:
- Permian Basin associated gas is a big part of the picture.
- Operators in South Texas, including the Eagle Ford shale, are also part of the picture.
- “There is a disproportionately large LNG demand coming online in Louisiana, and not enough gas supply coming available in Louisiana,” Myers said.
Just eyeballing overall U.S. gas production, supply might look adequate for projected demand – but supply has to get to where it’s needed, Myers observed.
“It’s one of those things that look OK on a spreadsheet, but balancing that supply is a different matter,” he explained.
“The metric to watch is U.S. demand compared to Permian-Eagle Ford-Haynesville production. I think of it as supply and demand at the Gulf Coast,” where most U.S. LNG infrastructure is located, he said.
In an analysis released in mid-April, the EIA forecast that U.S. LNG exports would increase 2 percent this year to average 12.2 Bcf/d and grow by an additional 18 percent in 2025 – even though the Biden administration paused approvals on applications to export LNG earlier this year.
Myers thinks “there is a strong case for Haynesville gas going forward, especially for operators that can get their gas to advantaged markets,” but the United States might still have a challenge in meeting LNG-related demand for gas.
“In theory, you could ramp Haynesville (gas production) really hard and try to fill it that way. But the Haynesville is not a new play,” and it has already seen significant development activity, Myers noted.
“It’s not going to run out of inventory in the short to medium term, but I think it’s fair to say that trying to fill that LNG demand through the Haynesville would take an unprecedented ramp-up in rigs,” he said.
Myers recently attended a meeting presentation on Japanese gas demand where a speaker observed that “a $1 increase to Henry Hub (gas spot price) has a big impact on operator economics, but it doesn’t have a big impact on the elasticity of whether or not buyers in Japan will buy the gas.”
European natural gas distributors were formerly hesitant to sign long-term LNG supply contracts, in part considering a potential energy transition effect on longer-term hydrocarbon demand, Myers noted.
“The hesitation is gone now. Europe has started to lock in long-term supply. Asia is already doing it,” he said.
Based on the positive signals, both analysts and operators expect growing U.S. gas demand and increasing prices. And the industry is looking for continued consolidation in unconventionals and the midstream, in processing and pipelines, with a coming merger wave in natural gas.
“I don’t think it makes a lot of sense to be a small operator in the Haynesville,” Myers observed. And, “at the end of the day, I’d say there are a ton of small Haynesville operators.”