Tom Shepstone
Shepstone Management Company, Inc.

Two seemingly unrelated stories from this week suggest Pennsylvania natural gas could make the Commonwealth king of the hill with a little help from LNG.

Two fascinating stories this week tell me what a glorious future Pennsylvania has with respect to natural gas development. One is from Australia and the other is an article from the always useful Today In Energy site. Put them together and the picture becomes clear; LNG ports such as Cove Point, combined with a few pipeline projects to get the Pennsylvania natural gas to the ports are going to open up the world and maybe even New England as markets, making the Keystone State king of the hill for natural gas production.

Let’s start with the Today In Energy post from yesterday. Here are the salient points, beginning with one very impressive chart (emphasis added):

Pennsylvania and Ohio had the two largest annual natural gas production increases from 2015 to 2016, reflecting higher production from the Utica and Marcellus shale plays, which have accounted for 85% of the U.S. shale gas production growth since 2012. Production in Pennsylvania and Ohio has accounted for an increasing share of total U.S. natural gas production in recent years, growing from less than 2% in 2006 to 24% in 2016.

Pennsylvania surpassed Louisiana in 2013 to become the second-highest natural gas producing state, behind Texas. Although both states had higher production in 2016, Ohio surpassed West Virginia last year to become the seventh-highest natural gas-producing state. The increased productivity of natural gas wells in the Marcellus Shale and Utica Shale is a result of ongoing improvements in precision and efficiency of horizontal drilling and hydraulic fracturing occurring in these regions…

EIA’s Short-Term Energy Outlook projects that natural gas production will increase in both 2017 and 2018 as natural gas prices rise, resulting in higher rig activity. Spot natural gas prices at the Henry Hub, a natural gas market benchmark, fell from $2.63 per million British thermal units (MMBtu) in 2015 to $2.51/MMBtu in 2016. Henry Hub prices are expected to increase to an annual average of $3.10/MMBtu in 2017 and $3.45/MMBtu in 2018. These price increases reflect the expectation of increased natural gas consumption, increased exports, and lower average inventory levels.

What’s apparent from the chart above, is even more so in this one prepared used the EIA’s Natural Gas Monthly data:

The trend is clear; Pennsylvania will soon overtake Texas as the nation’s largest producer of natural gas. It could come sooner rather than later if what we’re now seeing with LNG accelerates, which brings me to the second story. This one is from Hellenic Shipping News and discusses LNG happenings down under:

Plans to build a gas pipeline from Western Australia to the east coast, which Malcolm Turnbull has labelled “an opportunity,” are unlikely to fly because it would be cheaper to ship it around the country as LNG, analysts say.

In a report to clients yesterday, Ord Minnett said a 3000km pipeline from Dampier to the Moomba gas hub in South Australia would cost more than $5 billion and would deliver gas to Sydney at a cost of $13 a gigajoule, which is well in excess of current prices.

“We believe an LNG import terminal, whether it gets gas from WA, the US, or on the Asian spot market, would make more economic sense,” Ord Minnett said.

Yes, LNG is now a competitor to pipelines and opening up whole new markets both near and far. Note Sydney, Australia could become a market for LNG from Western Australia or our LNG from Pennsylvania. Bear in mind also that with pandering politicos preventing new pipeline development in New York, Massachusetts and other areas of gentry class smugness who nonetheless want to keep warm in the winter, LNG provides a way around that obstacle as well.

From here at Cove Point to Boston?

One can envision cargoes of LNG now coming into Boston from Trinidad and Tobago, instead coming in from Cove Point. That most likely would be Pennsylvania natural gas, of course. Do the economics work? I really don’t know, but given the fact those smug Bostonians imagine paying more demonstrates their superiority, it’s certainly not out of the picture. There’s more than one way to get Pennsylvania natural gas to where it’s needed and given that LNG is now a global market, why shouldn’t Trinidad and Tobago have some competition?

Regardless, this much is clear; Cove Point and LNG are going to allow more Pennsylvania natural gas to make it to market. Whether it goes to Sydney or Boston is hardly important. The bottom line is that there will soon be another outlet for that gas and it is likely to make Pennsylvania king of the hill in the not too distant future.