American Oil and Gas Reporter - January 2021 - 51

Outlook America
Dorado play in South Texas, which includes the Austin Chalk
and Eagle Ford, looks very attractive. It may help stabilize
output from the region later in the year. As noted, the Marcellus
and Utica have distinct challenges that will make it difficult to
grow production beyond current levels.
That is broadly the case in every play. Operators are going
to be hard-pressed to do more than bring back a small number
of rigs to maintain production at current levels. There will be
activity in a few bright spots, but generally, the supply
response will take time to materialize. The market is going to
have to balance more on the demand side than on the supply
side this year.
In other words, prices will have to rise high enough to drive
significant amounts of demand out of the market. That will
trigger fuel switching to coal in the power sector, and potentially
even disrupt LNG exports to conserve natural gas supplies for
domestic consumption.
If everything bears out as we envision, domestic prices will
not only rise enough in 2021 to displace gas in power generation,
but could have to rise significantly enough to back U.S. LNG
exports out of overseas markets. Should that occur, opportunities
will emerge for producers to hedge their production and begin
to grow supply, with the caveat that adding rigs in the back half
of this year will not impact production until sometime in 2022.
A best guess estimate for an average rig count in the fourth
quarter is between 100 and 125, or a 25%-50% increase over
the current count. But again, a lot will depend on all the factors
we have identified, not the least of which is capital constraints
and producers' ability to ramp production even with the strong
price incentives in place.

power generation will be increased carbon dioxide emissions.
Ironically, that may be the price of canceling and delaying the
Atlantic Coast and other pipelines that could have allowed additional gas supplies to reach the market.
What if fuel switching in power generation is not enough
balance demand with available supply? Global LNG demand is
strong this winter and is expected to remain so for the next
couple years. LNG demand is weather-sensitive, so there is
always uncertainty in the range of potential outcomes. That
said, given forward price curves and severe weather in Asia this
winter, which has drawn a large number of LNG cargoes to
Asia and depleted European storage, U.S. liquefaction plants
likely will run near maximum capacity for much of this year.
What happens next with LNG exports will depend, in part, on
how much gas is left in storage at the end of March. With
demand for space heating and LNG exports tapering off, will
there be a sufficient buffer at winter's end to allow the market to
balance during the injection season solely through prices rising
sufficiently to compel generators to dispatch coal-fired capacity?
If the answer to that question is yes and there is enough gas
left to allow storage to be replenished adequately during the injection season by switching power generation to coal, then U.S.
prices may top out in the upper-$3.00 to low-$4.00 range and
LNG exports would be unaffected.
But if the answer is no and the market cannot be balanced by
fuel switching alone, then Henry Hub prices will need to rise
high enough to curtail U.S. LNG exports to keep more gas in
the United States. If the global LNG demand remains tight,
prices at Henry Hub might need to go much higher than
$4.00/MMBtu to keep U.S. gas at home.

Let's look closer at how demand may respond
in the higher-price environment. This is the
part of the forecast that is hardest to fathom - and to
stomach. Gas demand for both power burn and LNG
exports hit record highs in 2021. How do you see
demand in those sectors reversing course?

Let's reflect on that. The situation you are describing is the opposite of what has occurred
since the introduction of U.S. LNG exports. Low-priced
domestic gas production allowed the United States to
export low-cost LNG supplies, in effect, forcing LNG
supplies in other parts of the world to compete on a
price basis with the U.S. market. In your scenario,
global LNG markets would force the U.S. market to
compete on a price basis for domestic production. And
removing U.S. LNG for any length of time should theoretically increase global LNG prices, right?

Q:

WEISSMAN: Demand has to be viewed in the context of
price, and it is not always pretty. The short answer is that with
supply unable to grow, demand growth must be curtailed. If demand were at the levels one would expect at the current forward
price curve, storage would fall to catastrophic levels. At today's
strip prices, our models show storage potentially going negative
next winter if weather resembles anything close to normal. Obviously, that will not happen. Instead, prices will rise as much
as needed to bring the market into balance.
Most of the rebalancing will occur initially through fuel
switching in the power sector. In fact, we think one of the main
stories of 2021 will be gas displacement in power burn. The
magnitude of the price increase to accomplish this could be
very large, and the amount of demand displacement could be
severe: easily 4 Bcf/d-5 Bcf/d.
One likely result of consuming less gas and more coal in

Q:

WEISSMAN: That is exactly right. The global natural gas
market is already very tight. Spot prices at virtually every major
hub are at their highest levels in years and the forward curves
for 2021 have moved up significantly this winter. The United
States actually is the only major hub in the world in which
prices have remained weak.
The United States has brought on a tremendous amount of
liquefaction capacity, and that has been a great thing for both
the domestic industry and consumers worldwide. Initially,
though, it created excess supply in the global market, which
JANUARY 2021 51



American Oil and Gas Reporter - January 2021

Table of Contents for the Digital Edition of American Oil and Gas Reporter - January 2021

Contents
American Oil and Gas Reporter - January 2021 - Intro
American Oil and Gas Reporter - January 2021 - Cover1
American Oil and Gas Reporter - January 2021 - Cover2
American Oil and Gas Reporter - January 2021 - Contents
American Oil and Gas Reporter - January 2021 - 4
American Oil and Gas Reporter - January 2021 - 5
American Oil and Gas Reporter - January 2021 - 6
American Oil and Gas Reporter - January 2021 - 7
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American Oil and Gas Reporter - January 2021 - Cover3
American Oil and Gas Reporter - January 2021 - Cover4
https://www.nxtbook.com/nxtbooks/aogr/202403
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