- US Henry Hub gas prices are revised lower
- Dutch Groningen gas production will be halted
- Oil prices reached the highest level in three years
More supply, less demand for gas in the US
The US gas supply continues to rise. Not only the number of gas drilling rigs is increasing, but also higher gas production as by-product of crude oil is growing. Currently demand related factors drive the US Henry Hub natural gas price. Meanwhile, supply related factors mainly drive oil prices. In recent years, higher gas supply was easily met by the rise in gas demand.
As a result of the low gas prices, gas has increased its share of the US energy mix – or better, US electricity mix. Gas has partly replaced thermal coal. Indeed, natural gas became the most important source of energy for power generation in the US. On top of that, exports of Liquefied Natural Gas (LNG) also increased. Although US President Donald Trump tried to revive the US coal industry via legislation, the percentage of coal usage in the energy mix was hardly affected so far. The main reason for this is that lower natural gas prices have attracted energy producers as well as energy consumers. A positive side-effect of the shift from coal to gas was that the US carbon emission dropped significantly in recent years .
There are signs that the rising trend for gas demand in the US may come to an end soon. This is because of a drive towards renewable energy. For example several states in the US – especially California – have formulated their targets to reach a certain amount of renewable energy as a percentage of the total energy mix. These ambitious targets may result in major changes in the energy mix during the coming years. The export of gas (mostly LNG) is expected to show a continuous increase in the coming years. However, this is strongly dependent on price developments. Especially the transportation of LNG over longer distances is costly and therefore less attractive.
Downward revision of our Henry Hub natural gas price
Currently, the positioning of market speculators do not suggest a clear directional view. Both speculative long- and short positions have been reduced in recent weeks. Usually harsh weather conditions could strongly impact spot prices, in particular. Therefore, weather remains a crucial factor for gas prices during the upcoming summer: a warm summer leads to more demand (higher demand for gas-empowered air-conditioning) than a cool summer.
For the coming years supply will probably increase, either via direct gas production or gas in the form of a by-product of oil production, the so called associated gas. Meanwhile, we expect local demand to plateau. As a result of this change in the expected balance, we see less upside potential for the Henry Hub gas prices than we had factored in in our price forecasts. Therefore we decided to revise down our 2018 and 2019 Henry Hub gas prices. For 2018, we now expect an average price of USD 2.75/mmBtu (from USD 3.25/mmBtu) and for 2019, we expect an average of USD 3.00/mmBtu (from USD 3.50/mmBtu). See Table 1 for more details.
Groningen gas production will drop to zero in 2030
At the end of March, the minister of economic and climate affairs Eric Wiebes surprised everyone by announcing the stop of Groningen gas production to zero in 2030 from 25.58 billion cubic meter (bcm) in 2017. The decision was made to ensure the safety of the Groningen citizens who are currently exposed to the impact of the earthquakes. In 2022, the gas production should already be reduced to a maximum of 7.5 bcm per year. Earlier, the market anticipated a decision to lower production to 12 bcm per year based on an advice of the State Supervision of the Mines (SodM). The advice of the Gasunie was even a production of 14 bcm per year to guarantee the security of supply. The minister decided otherwise. For the moment, the policy regarding the smaller production fields remains unchanged.
With this government decision new uncertainties emerge. The most important one is the security of supply. By expanding on of the existing nitrogen factories, more gas imports(high caloric) gas can be transformed to the (low caloric) Groningen gas quality. Dutch households could use this gas for consumption. Expanding the nitrogen factory capacity is only one of the necessary steps. Further energy savings, gas storage, and possible gas production from new small fields are other measures which can help to lower the dependence on Groningen gas.
From exporter to net-importer, what does that mean for The Netherlands?
In recent decennia, the Netherlands has benefitted from the revenues made by selling Groningen gas. With some reserves left, the total Dutch earnings will rise to somewhat over EUR 300 billion from gas (since the start of production in the early sixties). One can expect that this decision to cut production can significantly affect the Dutch government budget. Nevertheless, the percentage share of revenues from gas production, of the total Dutch government revenues and GDP, has come down significantly. This does not come as a complete surprise. After all, the combination of lower production and lower gas prices has resulted in lower revenues. However, as a result of ongoing economic growth, the lower gas income was balanced by economic windfalls. Therefore, from an zero-sum perspective, the timing to reduce the Groningen gas production to zero may be just right.
The biggest challenge will be the costs to halt production. These costs include the enlargement of an existing nitrogen factory (estimated at EUR 500 million), and the reparation and handling of claims of house owners who were affected by the earthquakes in Groningen. The minister is currently in discussion with the shareholders of the Nederlandse Aardolie Maatschappij (NAM) – namely Exxon and Royal Dutch Shell – to compensate for these damages. At the same time, there is some fear that these shareholders would claim some compensation for the reserves which, as a result of the government decision to cut gas production, turned out to become stranded assets. All these (possible) costs come on top of the investments which should be done to meet the carbon emission reduction targets as agreed upon in the Paris climate agreement. The Dutch government decided in recent decennia not to save these gas revenues in a sort of pension fund like the Norway did. However, the Netherlands decided to make these funds annually available for the fiscal budgets. This means that the investments and costs which will be made during the coming years will be added to the government spending and may result in higher taxes (like the Opslag Duurzame Energie (ODE) which is already part of the Dutch consumer electricity bill).
The TTF gas prices remained almost unchanged after the announcement. Earlier this year, we already revised our TTF gas prices higher. The underlying analysis can be found here.
Oil prices reached the highest level in three years’ time
Higher geo-political tensions supported oil prices. Several rockets were fired from Yemen to Saudi Arabia. On top of that, the possible usage of chemical weapons by the Syrian government triggered a further rise of tensions between the US and Russia. Finally, on 12 May, President Trump will make a final decision on a possible withdrawal of the US from the Iran nuclear deal. Such a decision could impose a revival of the US sanctions against Iran, and therefore hinder the Iranian oil exports. As a result of this threat, oil prices rose. Brent reached a three-year high of USD 72.58/bbl and WTI reached USD 67.39/bbl. The new Chinese crude future (Shanghai Crude) also rose – converted to USD – to USD 67.77/bbl and thereby remained below the introduction price on the 26th of March (USD 68.98/bbl).
Geopolitical tensions pushed market fears of higher US crude production to the background. In recent weeks, the upside potential for oil prices was capped by fears of oversupply based on higher US shale oil production. The International Energy Agency (IEA) recently indicated an expected growth of 1.5 million barrels per day (mb/d) of global demand in 2018. Due to this ongoing stable rise in demand, we expect that there will be enough room for supply growth by both OPEC and non-OPEC (mainly US) during the coming two years. In fact, this should happen to prevent shortages in the global oil markets. Especially now normalized global inventories being at or below the five-year averages. Our forecasts are based on a situation where global demand will continue to increase, some oil supply will shift from one producer to another, and the market continues to speculate on higher oil prices in the future. Therefore, we keep our expected Brent forecast of USD 75/bbl at the end of 2018, and even somewhat higher prices in 2019, unchanged. We did add our 2020 forecasts to the table.