Top 10 RBN Energy Prognostications for 2024: Year of the Dragon - Breathing Fire?

Friday, 12/29/2023  Published by: Rusty Braziel

Excerpt.  Link to full article:  https://rbnenergy.com/top-10-rbn-energy-prognostications-for-2023-y...

The years of natural gas storage wandering in the economic wilderness are over. Way back in the early-to-mid-2000s, storage values were very high, with the winter-summer forward differential maxing out at $1.70/MMBtu (2007-08). Consequently, midstreamers were building scores of new storage facilities. But at the same time, shale gas production was increasing rapidly, and those additional supplies were annihilating the need for all that storage. The result was a massive infrastructure overbuild, resulting in a virtual collapse in storage values. The winter-summer spread averaged no more than $0.30/MMBtu for nearly a decade, from 2013 to 2022. But in 2023, the combined impact of weather market disruptions, rapid growth in LNG export capacity, and demand for wind/solar backup supplies has fired up the demand for storage capacity. That, in turn, has pushed the value of storage higher, bringing the winter-summer differential back to a much more attractive level. At the start of 2023, the forward differential hit $0.84/MMBtu, and now it’s up to $0.92/MMBtu and averages $0.80/MMBtu in the forward curve for the next seven years. Gas storage is also seeing a value bump from increasing price volatility from those same market factors. The value that storage operators can charge for their services is much higher this year but is still just below the ragged edge of what it takes to build significant new storage capacity. However, for operators of existing storage facilities, the years of wandering in the economic wilderness are in the rearview mirror.

Natural gas with high nitrogen content is not good for LNG, but more is coming in 2024 anyway. Nitrogen in natural gas is nothing new, but it is becoming much more of a problem for two reasons. First, a few counties in the Midland Basin (mostly West Texas’s Martin, Howard, Dawson, and Borden) are producing a lot of high-nitrogen-content gas: 6%-8% or more in some areas. Second, LNG terminals and buyers of LNG don’t like nitrogen one little bit. (It generally mucks up the process of liquefying, transporting and consuming LNG.) It’s been a particularly difficult issue for Freeport LNG since the Permian Highway Pipeline went into service in early 2021, bringing more Midland gas into the Freeport supply area, and then got a notch worse when the pipe expanded by 550 MMcf/d in December 2023. But there’s much more potentially high-nitrogen gas coming into Freeport’s primary Katy/Ship Channel supply area when the 2.5 Bcf/d Matterhorn Pipeline starts flowing in late 2024. One leg of that pipe is pretty much a straight shot from the highest-nitrogen region, coming down to the Coastal Bend Header that feeds Freeport, and also Y’s off to Katy. In our view there’s not much question that somebody is going to have a problem. The big question is, will it be the LNG export terminals, the pipelines, the gas processors, the producers, or all of the above? Yup, our prediction is that it will be all of the above.

Eagle Ford has a new lease on life and it’s dry gas from deep South Texas. A new chapter has opened for the Eagle Ford. Back in 2010-15, it was the darling of the new shale oil plays, increasing production from near zero to 1.7 MMb/d in five years. And a lot of associated gas came along with the basin’s oil and condensate production. But issues with weak prices, inconsistent well economics and high gravity/condensate crude quality drove many producers to other plays. Oil production out of the basin never returned to those lofty 2015 levels, languishing around 1.2 MMb/d since COVID. But Eagle Ford natural gas is a different story, clawing back almost 2 Bcf/d over the past couple of years to more than 7 Bcf/d in 2023. The Eagle Ford natural gas rejuvenation is not coming from the traditional basin acreage, however. Instead, it is way down in Webb County and it is dry gas — none of those pesky liquids. These are high initial production rate wells with great economics — as long as natural gas prices are not in the dumper, which they likely will be in 2024 (see Prognostication #5). But hang on, Eagle Ford. Better gas prices and another surge of production growth are on the way. Just maybe not in 2024.

Energy markets have fundamentally and permanently shifted and we’ll see the implications in 2024. With the chaos of COVID and Ukraine-induced price spikes behind us, there is the temptation to think energy markets are going back to the way they were before. And with an increasing emphasis on energy security, there’s a notion out there that ESG and green initiatives don’t have quite the emphasis that they did a couple of years back. Yes, the market does look a lot more familiar. Prices for crude, gas and NGLs have been reasonably stable.  Production is growing at a healthy rate. And infrastructure bottlenecks are again front and center, with midstreamers better able to get the necessary commitments to push projects forward. But don’t be fooled. This is not “back to the future.” Energy markets have fundamentally shifted, with renewables and other green projects now permanent fixtures of the market landscape. So much so that traditional fossil-fuel markets will be increasingly buffeted by the impact of renewable advances. It’s a similar story for investments in energy infrastructure. Getting brownfield and expansion projects off the ground is — and will continue to be — a lot easier than greenfield projects to do anything, with the exception of investments with some kind of green angle. After all, as we saw just a few weeks ago in Dubai, much of the world still believes that fossil fuels are something to be phased out. This is not going away.