CERAWEEK: US, global gas market volatility is 'call to action' for infrastructure

Recent volatility in the US and global gas prices will likely continue over the next 12 to 18 months fueled by diminished capacity in the coal market and supply uncertainty in Europe, experts say. But the current global crisis could drive new infrastructure investments that help to ease volatility longer term.

Over the past six months, US gas prices have hit historic highs, briefly trading at over $6/MMBtu this winter. Global prices meanwhile have surged, recently trading as high as $65 in Europe and nearly $85 in Asia in the wake of Russia's invasions of Ukraine, data from S&P Global Commodity Insights shows.

While short-term drivers of volatility will be slow to change, meaningful additions to the US and global natural gas infrastructure, including storage, pipelines and increased LNG export capacity could bring stability to the gas market longer term, panelists speaking from the CERAWeek by S&P Global energy conference in Houston said March 9.

Domestic, global volatility

In the US market, a steady rebound in domestic gas production over the past year has failed to keep pace with a surprisingly quick economic recovery, leaving the market short on supply this winter.

According to Samantha Dart, head of natural gas research at Goldman Sachs, diminished capacity in the domestic coal market has been a major factor behind the US gas market's inability to cap the runup in prices this winter with numerous generators simply unable to switch to coal based on prices alone.

"We estimate that there's about 5 Bcf/d of swing demand between gas and powder river basin coal," she said. "Despite incentives for full substitution, gas demand has consistently surprised to the upside."

While coal producers have made some changes at the margins, the coal market's diminishing size and weak long-term outlook has made nearly all suppliers reticent to meaningfully increase production or capital expenditures in the US or globally -- a factor that has and will continue to add price volatility for gas as renewable power generation continues to grow.

In Europe, strong demand has also been a key driver of recent global gas market volatility with tight storage inventories, supply disruptions and uncertainty there adding to many utilities' short-term requirements – all factors that are likely to linger over the short to medium term.

Need for infrastructure

Delays in building new infrastructure across the gas value chain have also increased the potential for pricing volatility, panelists said.

"It sets you up for a lot more volatility if you don't have the infrastructure to move gas to the regions that aren't cold to the regions that are cold," Brian Lloyd, regional vice president of external affairs and communications at Sempra Infrastructure, said.

Navigating the permitting process to build new gas pipelines can take four years or more for projects that take just four to six months to construct, Chad Zamarin, senior vice president of corporate strategic development at midstream operator Williams, said.

Even brownfield expansions of pipeline infrastructure can get stuck in the permitting process, Lloyd said, pointing to a case of a compressor station upgrade in Arizona that has been before FERC for 25 months.

Permitting delays can also dampen production growth, exacerbating supply-demand gaps when they emerge. The uncertainty is likely deterring some projects from even entering the filing process, Zamarin said, "because the gauntlet is too significant."

Chesapeake Energy's CFO Mohit Singh lamented that the producer's Appalachia inventory is "the best asset in our portfolio, and if we could, we would love to put more capital into it" if not for "systematic infrastructure constraints."

Beyond pipelines, experts said building additional gas storage capacity – both in the US and Europe—could go a long way toward smoothing volatility.

About European policymakers exploring solutions to gas supply concerns, Dart suggested that "they are going to have to mandate storage builds."

"The current crisis should be a call to action for new infrastructure," said Chad Zamarin, senior vice president of corporate strategic develop at Williams. "We need to mobilize to unlock the energy we have," he said.