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Local companies make changes amid higher natural gas prices

Local companies make changes amid higher natural gas prices

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Natural gas prices will remain almost triple than what they were a year ago, according to the June 2022 Short-Term Energy Outlook released by the U.S. Energy Information Administration.

The EIA expects the Henry Hub spot price to average $8.69 per million British thermal units (MMBtu) in the third quarter of this year, up from an average of $8.13/MMBtu in May. The trend above $8/MMBtu will remain throughout the rest of the year before the EIA projects the average retreating to $4.74/MMBtu amid rising natural gas production in 2023.

In June 2021, the average Henry Hub natural gas spot price was just $3.21/MMBtu, resulting in a 170% increase year-over-year.

“Natural gas prices are rising mainly because of three factors: natural gas inventories that are below the five-year average, steady demand for U.S. LNG exports, and high demand for natural gas from the electric power sector given limited opportunities for natural gas-to-coal switching,” according to the EIA report.

Eric Smith, associate director of the Tulane Energy Institute, said the forecast seems reasonable with the impact of warmer weather maintaining demand while supply stagnates over the balance of the year.

“I would expect that the chemical industry will adjust to the higher prices by passing through the higher natural gas costs to the consumers of their products,” Smith said. “One possible caveat would be that high utility prices may disproportionately impact residential consumer demand for air conditioning and hence electric power consumption. A second issue might be U.S. government efforts to curtail LNG exports either directly or through the same sorts of delaying tactics seen with crude oil prices.”

Amid higher prices, Smith said local petrochemical companies are adjusting their operating conditions. For example, the fertilizer producers such as CF industries are experimenting with the production of small amounts of green ammonia produced from green hydrogen.

“Another longer-range plan has Air Products building a plant to produce Blue Hydrogen in conjunction with CCUS (Carbon Capture, Usage and Storage) efforts,” Smith said. “The same can be said for several LNG producers who are being pressured by international companies to account for CO2 produced in conjunction with liquefying natural gas.”

According to the EIA, Louisiana is the third-largest natural gas-consuming state, after Texas and California. Louisiana has the third-highest natural gas production and reserves. The state accounts for 9% of U.S. marketed natural gas production and holds 8% of U.S. natural gas proved reserves.

In 2021, Louisiana’s LNG terminals handled about 52% of U.S. LNG exports. The EIA forecasts that U.S. LNG exports will average 11.9 billion cubic feet per day for all of 2022, a 22% increase from 2021, with 75% of total U.S. LNG cargos heading to Europe, compared with 34% in 2021. At the same time, U.S. consumption of natural gas is up 3% from 2021, at an average of 85.3 Bcf/d.

“In the residential and commercial sectors, increasing consumption results from colder temperatures in 2022 than in 2021, and in the industrial sector, rising economic activity contributes to higher consumption,” says the EIA report. “Limited natural gas-to-coal switching in the electric power sector, despite high natural gas prices, results in increased consumption of natural gas for power generation.”

U.S. natural gas inventories ended May at 2.0 trillion cubic feet (Tcf), which is 15% below the five-year average.

“Inventories are down for multiple reasons, not just the rapid ramp up in exports of LNG to Europe in response to the war,” Smith said. “A second major effect is the return of consumption following the end of the coronavirus restrictions on demand. Then too, the summer peak in air conditioning demand is a potent effect across the U.S.”

Smith said Louisiana’s economy, compared to other domestic markets, can withstand higher hydrocarbon price environments since the added economic activity more than offsets the higher costs for Louisiana citizens.

“The relative costs on the Gulf Coast are also lower because of lower shipping costs between the suppliers and the consumers,” he said. “That is true for both residential and industrial consumers. Our prices for gas and electricity may be high, but they are lower than virtually all other states.”

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