High expectations: North America gas prepares for calls to grow

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Hill Vaden:

All right, welcome back to EnergyCents, an S&P Global Commodity Insights podcast, covering all topics on the intersection of energy and finance. This is your host, Hill Vaden, and I'm here with your other host, Sam Humphreys.

Sam, how's it going?

Sam Humphreys:

I'm good. Thank you, Hill. How are you?

Hill Vaden:

I'm doing all right. I was about to sneeze right as I pressed record.

Sam Humphreys:

That was a very distinct force there.

Hill Vaden:

But it stopped.

Sam Humphreys:

You start it out, that's fine.

Hill Vaden:

I'm not sure, I've never listened to a podcast that opens with a sneeze. It'd be a very unsettling audio experience.

Sam Humphreys:

Absolutely.

Hill Vaden:

Well, we have a very settling audio experience in store for listeners today. We're talking with, sorry, Sara Hakim, who is an expert in North American natural gas markets. She's talking to us from Washington DC, which is, a lot going on in Washington, DC that affects energy markets today.

Can you talk about some things that people should keep their ears out for?

Sam Humphreys:

Yeah, absolutely. And today just is the 2nd of April, so.

Hill Vaden:

It is.

Sam Humphreys:

This is going out a little bit further-

Hill Vaden:

Did you do anything for April Fools?

Sam Humphreys:

... ahead of time. No. No, I always forget about that.

Hill Vaden:

Yeah, I didn't either.

Sam Humphreys:

Yeah. But luckily there's no April Fools with North American natural gas markets at the moment. It's pretty hard to segue into that. But like you said, there's a lot going on in Washington at the moment, but we avoided talking about that because there's a lot of uncertainty there.

But one thing that was interesting is the number of FIDs that were taken for LNG projects in Q2 2024. What that kind of means going forwards, is a huge amount of potential gas coming online there. And the price of gas at the moment and how that relates to coal-fired generation and the flexibility in the system there, again, with some of the new orders and sentiments in the White House at the moment for coal power, and what that could do in the market.

And what about you? Any key takeaways?

Hill Vaden:

Yeah, just the overall, she does a good job of painting a picture for us where natural gas, particularly in North America, is having somewhat of a moment and kind of understanding where the growth drivers are relative to one another. That being gas used and electrification domestically in the US or putting it on a boat and moving it someplace else to be used in electrification.

But a lot of moving parts, a lot of opportunity, and as always, where there's opportunity, there's risks. So Sara does a good job diving into all that and we can hand off now.

Sam Humphreys:

Enjoy.

Hill Vaden:

All right, Sara, well thank you so much for joining us today from DC to talk about US natural Gas and the opportunity or the challenges in front of it as a low-carbon fuel in a carbon-constrained world.

So Sara, can you maybe set up the macro framework for the US natural gas sector as we are what? Four months? Beginning of four months, it's April 2nd. So as we're entering 2025 still.

Sara Hakim:

Thanks, Hill. Yes, a lot is going on in the US and natural gas markets globally as well. A lot of opportunities and challenges are ahead and 2025 is a year that we will see lots of developments there. So there are developments on the LNG export side, on the power side, what happens also with the upstream sector and how producers respond. So a lot of things to watch out for and to see how that will shape the market.

The gas market in the US has been fairly loose for the past two years with prices pretty low. That quickly changed in 2025 and how that develops through the rest of the year will have repercussions on prices this year and going forward.

Sam Humphreys:

So let's maybe take a look at the start of the whole industry, so within the upstream space. Where does it sit at the moment? Is there be other big projects ongoing at the moment to increase capacity? What's it looking like just at the, where are we? April 2025?

Sara Hakim:

Right. So in the upstream space, what's been happening is that the capital discipline environment that producers have been living within over the past couple of years or so is something that is still happening in 2025. So we don't have an issue of resources or capacity in the US. It's more of what producers want to do and if they want to increase production and when. That is the key question that we're being faced in the US.

And for 2025 in particular, several producers have voiced that they're not planning on increasing production very quickly. So that will cause some tightness in the market because we're expecting a lot of demand to come this year. We're already seeing it from US LNG export projects that have come online already. So how producers behave this year will be key.

Hill Vaden:

So could you talk a little bit more in detail about, I think some of the enthusiasm for natural gas right now is you've got growing markets both globally with LNG exports from the United States and growing markets with application and power, converting those gas molecules into higher value electrons. And kohler's retiring and other things, so where are the big growth drivers and is one more meaningful than the other?

Sara Hakim:

We have on the LNG export front, that's definitely for now the elephant in the room for growth in demand, at least as we see it today. We have more than doubling of US LNG exports, if you think about it, over the next few years. We're already seeing that momentum happening already in 2025 with couple of projects starting commercial service. So that has been underway and it's clear the projects that are coming have mostly reached FID. We know what's coming. We see that demand.

On the power side there's more uncertainty, I would say, when it comes to gas fire generation. We have heard a lot of different forecasts for electricity demand growth, what AI and data center would do to do those forecasts. We have our own forecast at SMP Global Commodity Insights. And how that demand, how that electricity demand will be supplied, is a key question, I would say, in the US.

Gas is going to play a role, but you also have other technologies such as renewables. And what we've been seeing, especially recently in the US with the new administration, what's happening with the possibility of tariffs and the repercussions of that, the headwinds from executive orders for offshore wind and other headwinds that the renewable industry may be facing. The role of gas may be bigger than we think over the next few years. So that's something that we are definitely watching out for and we could see more growth in that sector when it comes to gas.

Sam Humphreys:

So you mentioned there, which was going to be my next question, the role that renewables will pay in the power sector. But going back to a previous point, you said that operators this year are less enthusiastic about increasing production. How do those two things align to meet the demands that we're sort of anticipating that you sort of mentioned?

Sara Hakim:

Right. So we think there's going to be some mismatch in the pace of that demand that's already underway and the response of producers. We think that production is going to play catch up to that demand and that's what's going to tighten the market and raise prices.

Producers want to see those higher prices and they want to see them for a sustained period of time so that they can go ahead and increase their drilling profiles and be confident that that price is there for a while. So that mismatch has to happen in a way for us to get that price signal for producers. So we're going to see a mismatch. The market's going to tighten, prices are going to go up until we see that production response come in.

Hill Vaden:

Can you be a little bit more specific? I'm not going to ask you to put a specific dollar and cents on it, but where are we today on gas price and how high directionally is there a limit? But before people start to respond?

Sara Hakim:

So we've heard a lot of different companies talk about this and gas prices today are around $4 and a lot of producers have a voice that they want to see prices north of that maybe some of them said up to $5, but definitely north of three $54 for a sustained period of time for us to see that renewed drilling activity that has been on downward trajectory since late 2022.

Sam Humphreys:

So of the projects that you mentioned, are there any particularly LNG projects coming up in the near term that could have significant impact on the market within the US?

Sara Hakim:

Yes. So we are already seeing that demand. So to put things in perspective, between today and the next few years, we're expecting almost doubling in US LNG capacity. Half of that is expected to come by Q1 2026. So that's a lot of gas that's hitting the market in 18 months period of time, which we think that's what I meant by production not really ramping as fast.

We already saw Plaquemines LNG come online in late 2024 that reached a daily high of two BCF per day, which was surprising for that project. It's higher than we thought it would reach another project, Corpus Christi LNG stage three that also started commissioning also in late 2024. And we're seeing more and more completions of those strains that are going to happen over this year. So you already have those two projects underway.

And then there's Golden Pass LNG that's also expected later in 2025 into 2026. So those are the ones that are coming now within the next year. And then we have more coming later in '27 and '28.

Hill Vaden:

And for all those who don't recognize those names, those are all places in Louisiana and Texas along the Gulf Coast.

Sam Humphreys:

Yes, the Gulf Coast.

Hill Vaden:

So help us out as we're thinking about that gas getting on a boat and leaving the Gulf Coast, right? You can head south and turn left and head out to Europe. You can turn right and head to Asia.

If you turn right, are you going to use the Panama Canal? Do you go around south, further south? Where's the big demand centers? Where's this gas going to get consumed?

Sara Hakim:

A lot of the demand is in Asia for for LNG and for US LNG, but some molecules will likely go to Europe as well. It also depends on the contracts that are in place and what happens with gas prices globally and if there are any spot cargos that could be sold or redirected depending on what's happening at that time. But those two are the biggest markets.

Sam Humphreys:

And what about the domestic market within the US? How much is going domestically?

Sara Hakim:

You mean how much gas is being consumed?

Sam Humphreys:

Sorry. Yeah, that was a terrible phrasing of that question. How much gas? I'm glad you knew what I meant. Yeah. Yeah.

Sara Hakim:

All right. So in the US, when you look at the domestic sectors for demand, I mentioned at the beginning of the call that's really the elephant in the room from a growth perspective for gas demand is US LNG exports and also some piped exports to Mexico.

Now when you look domestically, there's some growth in the industrial sector, not that much when you compare the scale to US LNG exports. And then you have the power sector. Now in the power sector, there are a lot of factors that would impact that growth. You would think that we have increasing electricity demand, we should have increased in gas power generation. That comes down to several factors.

One, how much electricity demand we're thinking is going to materialize and what share the gas will play. When it comes to gas, gas prices and the coal gas switching that happens in the US plays a role. So what I mean by that is that you can have the same need for that base load demand or the intermediate demand from the supply stack, but if gas prices rise, you're going to see a hit to gas fire generation. And that's what we are thinking for 2025. And that's what's going to keep that gas fire generation at bay in the US is the higher gas prices.

If you look at last year, gas demand from the power sector hit a record. It was the highest ever. It was 4% growth, year over year. Are we going to continue to see that? That's the biggest question, I would say. For us for now, given the higher prices that we're expecting, 2024 was record low year for gas prices, and that really helped that gas demand from the power sector to be elevated.

Going forward, we're having gas prices more than double than what we saw in 2024. So that's really going to hinder that growth potential from gas. So all of that to say is that the domestic upside to demand is fairly limited and it's mostly the exports part.

Hill Vaden:

Okay. So unpacking that a little if you can. So if gas prices rise to a certain point, you switch back to coal for some of that generation.

Sara Hakim:

Right.

Hill Vaden:

Can you talk a little bit more perhaps around the precision of where that price point is? I understand that most of the gas producers today are on edge, right? They're expecting higher prices this year.

At what point do you start to lose that demand and how much coal can get turned on given all their coal retirements of the past few years?

Sara Hakim:

Right. So let's start with the coal retirements. That's a good point there. So we've already seen about 45% of the coal fleet retire since 2011. A lot of that flexibility that we historically had on the coal gas switching is already gone. So we are left with a window that keeps on narrowing, year after year, as we retire that coal fleet.

So where in the price stack or in the supply stack and the price point we're going to see most of the switching? Usually it's around the two to $3 range. Once you drop below that, most of the switching is already happened from coal to gas. If gas prices were that low. And when you're above $5, you also are out of that band. So if prices hit $5 and keep going higher than that, it's not going to affect anything. Most of the switching have happened.

And if it goes below to 50, same thing. Most of the switching have happened. So it's between that two fifty to four fifty-five dollar range where we see that coal gas switching band being the most active there.

Sam Humphreys:

I may have dreamed this, but I'm sure I saw a report that was saying in the US that they were going to slow down the retirement of coal and actively look to dig. I think there was another iteration of "Drill, baby, drill. Dig, baby, dig."

Something like that. What impact would that have on this picture if that were to happen?

Sara Hakim:

Right. So if the coal retirements are slowed down, that's going to negatively affect gas fire generation from the perspective of if you retire that coal, the need for gas is going to be bigger to fill in the gap for that coal retirement. If you keep that coal longer, then there's that competition staying between coal and gas. So that's going to limit your upside, I would say, to gas for a generation, keeping those units online longer.

Now from a different perspective, your flexibility in the system is better with those coal units online. And what I mean by that, from the gas market perspective, you need that elasticity on the demand side to balance the market. And that's what's been happening historically is that as gas prices rise, because the market is tight, you get to have gas to coal switching. You rely on the coal units, that reduces your gas power generation demand, and the gas market tends to balance itself out. And prices also balance out.

Now if you start retiring that coal, that flexibility or elasticity is disappearing. The market's getting stickier, the prices tend to rise much faster and drop much faster. So by having those coal units on for longer, you're preserving that elasticity for longer.

Hill Vaden:

And you were saying, did I hear right, that the coal comes back into service as gas gets above $5? Was that ballpark?

Sara Hakim:

Ballpark, yes. It also depends on what coal prices are doing, right? So because it's a relative position between gas and coal. So if coal prices rise as well, that band increases.

Hill Vaden:

And how about on the LNG side? Is there a price point there that we should be aware of?

Sara Hakim:

So on the LNG side, then you start thinking of the competition with TTF and with global prices and at what point you would turn down US LNG utilization. That's a more complicated question I would say than coal gas switching. It has to do with a lot of things. It has to do with how long that price stays because there are contracts in place, it takes time to deliver that gas.

Usually once you start going above 10, $11 per MMBTU for US gas, that's where you start to getting into that band of possible lower utilization from US LNG exports. But it depends on the timing, I would say. How long would that price stay and a variety of other factors. So we may see turn down in utilization or not.

Sam Humphreys:

One thing we haven't really mentioned yet is, well, we've talked about putting liquefied natural gas on chips, but pipeline networks are also obviously key to the natural gas industry. So what projects are coming online to transport this gas, either within the US itself or internationally to its neighbors?

Sara Hakim:

Yes. So for pipelines, we need a lot of pipeline expansion in the US over the next few years for us to be able to get all of that gas to the LNG terminals. So the Permian and the Haynesville in Texas and Louisiana are major plays or basins where a lot of that gas is going to be sourced. And in those two areas, in Texas and Louisiana, we're expecting a lot of gas pipeline capacity to come online. The Permian itself that would have a pipeline capacity going east from the Permian to the LNG facilities, we're seeing about 6.5, potentially 6.5 BCF per day, coming online over the next few years.

To put this in perspective, today, Permian production is at 22 BCF per day. So it's like more than 25% potential growth from there, just from the pipelines. Just in Q4 2024, there were about 4.8 BCF per day of projects that took FID just in Q4 2024. That was interesting to see it all happen at once, but we're expecting even more than that to take FID soon. Are you interested in specific projects or this is good enough for the Permian?

Sam Humphreys:

I mean, it's interesting that there's that high rise. What drove that many FIDs in that one quarter alone, if that is such a significant uptake on projects, taking that previously?

Sara Hakim:

So the Permian, I haven't talked about the Haynesville yet, but there's a lot of takeaway capacity expected in the Haynesville. But on the Permian alone, the Permian has been growing very fast over the past decade, especially with the shale revolution and continuous pipeline expansions were needed to get that gas out. So most of the time that basin has been constrained where it's just waiting for that pipeline capacity to come online. And as soon as it comes online, it fills up pretty quickly.

So the Permian has been constrained, as well, in the US. A major pipeline came online in 2024, that's Matterhorn Express, so that helped that basin to breathe a little bit and get that production out. But seeing all the LNG that's coming and seeing that the Permian and the Haynesville will be primary sources to meet that demand, the price is reflective, that we are really constrained in that region, and seeing that demand that's prompting all that FIDs to happen. And the timing is important because once you need that FID, you need probably 18 months to build that pipeline. And that is needed in order to meet that LNG demand on time.

So that helps with why the timing happened in fuel for 2024.

Hill Vaden:

So talk a little bit about supply chains. So there's all this interest in gas as a fuel for electricity and other applications. If I need to move it around, I need to move it on a boat, I need to move it in pipe or I need to put it into a power plant. We understand that gas turbines for power generation, that the backlog is multiple years. The permitting process for any sort of project that moves from place A to place B, whether it's a transmission line or pipeline is really hard because there's a lot of stakeholders who can intervene.

Can you talk about some of these projects and where you see opportunity, constraints, or even acceleration if possible?

Sara Hakim:

Right. So one of the reasons why we're seeing all of that pipelines taking FID like in Texas and Louisiana, it's because they're intrastate pipelines and they are in states that the regulatory environment is favorable for pipeline development. So it's easier to get those pipelines built and geographically they're very close to those LNG facilities. So it works out.

Now, another place that we haven't talked about yet on this call, but everybody is looking at that, is the Northeast and the Marcellus in the Eureka place there. We have a huge resource, a very cheap resource. It's as cheap the Haynesville, if not cheaper, but it's the permitting for pipelines and the hurdles and the legal challenges that have been happening to get that gas out from the Northeast has been the main impediment there. Mountain Valley Pipeline is a great example of how long that process could take and how costly it could get to build pipelines out of that basin.

So that's why the focus has been more on the Permian and on the Haynesville. Well now with the current administration and with the hope of and more favorable environment for permitting, possibly we may see a true permitting reform happen in the US. We shall see.

Now is the time to probably have more momentum for those Northeast projects to happen. That could likely help get more Marcellus and Eureka production out. Now, challenges will remain. We will see how that will unfold. But there are more challenges that have always been in place when you think of getting pipelines across state borders, the Clean Water Act and the legal challenges there for clear water crossings. That will remain a big one, I would say. So we shall see how that unfolds over the next couple of years.

Hill Vaden:

You mentioned Mountain Valley Pipeline. Can you give an idea of what that timeline was, if that's a good example of a hard timeline?

Sara Hakim:

Yes. That was a lot of years. I think more like, what was it? Nine years for Mountain Valley pipelines.

Hill Vaden:

Nine years.

Sara Hakim:

Around that timeframe. And the cost was more than double from the original cost.

Sam Humphreys:

And so more than the original cost for that project, how much more expensive is it, on average, to build and establish pipelines in the Northeast, is it compared to down in Texas and Louisiana?

Sara Hakim:

The cost portion of it is not the actual cost of building the pipeline. If you're thinking like some similar size pipeline, similar number of miles, it's more the cost of litigation that they had to spend in order to get that project to the finish line. That's really the main cost hurdle for Northeast projects.

That said, speaking of the Northeast, just yesterday, Boardwalk Pipelines, they actually announced... Boardwalk Pipelines, they have a subsidiary called Texas Gas Transmission, which just yesterday started an open season for a Borealis Natural Gas Pipeline Expansion Project in the Northeast. So we don't know a lot of details yet on it, but it looks like to be a greenfield project to BCF per day capacity, which is typical for such pipeline projects that would actually take Marcellus and Uric gas from one county to another within Pennsylvania and hooks it to the Texas gas transmission system pipeline system that will take those molecules all the way to the Gulf Coast.

That's an interesting development, I would say, because it is in the Northeast. Even though it's within Pennsylvania, it's not crossing state borders, but it's still within the northeast. So we shall see how that develops.

Hill Vaden:

Okay. I'm sure lawyers are watching.

Sara Hakim:

Yes. Yes, indeed.

Hill Vaden:

So looking at time, the next six or 12 months, there's so much happening in North American natural gas right now. We're going to try to box you in and put you on the spot on one or two things that we should really watch other than price. That price is an easy thing for everybody to watch.

What are some specific levels of activity or projects or something that we should keep an eye on to understand the overall direction of North American natural gas this year?

Sara Hakim:

Right. So I would say one thing... I mean, we talked about a lot of things, right, that would answer your question. But one thing would be really how many US LNG projects would take FID this year? I think we may see more momentum for projects taking FID and that would be telling. Because even though it's a favorable regulatory environment now for these projects, there are legal challenges and global competition.

So how many of these projects actually could potentially come online will be determinant how US LNG projects will fit in the picture of maybe a potential oversupply period five years out. So it would be telling to see how many US projects actually take FID here.

The other one, I would say which we just talked about, which is the permitting process. How that shakes out this year will be very important for US pipeline projects.

Hill Vaden:

All right. Sam, any last minute questions from you?

Sam Humphreys:

No, let's leave it there. I held loads of questions and we could go down a whole rabbit hole. But no, that was fabulous. Thank you so much for spending some time with us today.

Hill Vaden:

Yeah. Thanks so much, Sara.

Sam Humphreys:

Of course, my pleasure.

Hill Vaden:

All right.

Sara Hakim:

Thank you for having me.

Hill Vaden:

Absolutely.