Rise in Europe’s demand drives up US natural gas

The United States’ natural gas industry has seen an investment boom due to the rising demand from Europe, even though the industry is facing challenges in pipeline construction. According to the most recent data available from the US, the production of natural gas reached a record high of 3.1 trillion cubic feet in October, a 50% increase from a decade ago. The growth of the industry started in the summer of 2021 when Russia reduced its shipments to Europe, following the US shale revolution in the early 2000s which resulted in the US becoming a net exporter of natural gas in 2017.

However, the growth has been interrupted by declining natural gas prices and the bankruptcy of Chesapeake Energy in June 2020. Nevertheless, energy companies have become more confident in the long-term demand for natural gas due to the changing geopolitical dynamics. In recent years, 14 new liquefaction terminals have been approved, with the first one set to begin operating in 2024. This could potentially double the US liquefied natural gas (LNG) exports over the next five years.

The increase in LNG has globalized the natural gas market to a certain extent, but the dynamics remain heavily localized. The benchmark European TTF contract prices are currently more than six times the level of the comparable Henry Hub contract in the US, which means that LNG exports are priced more closely to the US level and creates an opportunity for “middlemen” to sell them at European prices.

However, the industry is facing a challenge in the lack of pipeline capacity, especially in the northeastern US, where the Marcellus Shale, the country’s largest natural gas basin, is facing constraints. The Mountain Valley Pipeline, a potential solution, has been suspended for the past five years due to opposition from land owners, environmentalists, and climate activists. The lack of infrastructure can lead to price volatility during periods of high demand, as seen in New England, which relies on LNG for heating and is known for resisting new pipeline capacity.

In the long run, the US may export so much natural gas to Europe that prices across regions become more aligned. However, this will likely not happen for many years, according to Ryan Kellogg, a professor of energy at the University of Chicago.