Could a decline in oil and gas wells in the United States lead to a significant increase in the cost of producing methanol from natural gas?

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Yahua Consulting: Will the reduction in oil and gas wells in the United States lead to a significant increase in the cost of producing methanol from natural gas? 2015-10-15 　　 Natural gas-based methanol production in the United States is characterized by low costs and large-scale operations, and it is considered a potential important source of raw materials for the MTO industry in China’s coastal areas. However, with the slowdown in natural gas production in the United States, a gradual decrease in imports, a significant increase in export demand, and the growing need for natural gas due to domestic power generation and industrial development, the supply and demand balance of natural gas in the U.S. is set to tighten, which could lead to an upward trend in natural gas prices in that country. Could the cost of producing methanol from natural gas in the United States rise significantly in the future? Yahua Consulting will provide an in-depth analysis in the following text. 1. Decline in oil and gas drilling activities in the United States: Against the backdrop of sharp drops in international crude oil prices that have remained low, U.S. shale oil and gas producers have demonstrated remarkable resilience. The strategy adopted by many producers of reducing expenses by cutting down the number of drilling operations in order to improve productivity and maintain output has indeed worked, but as their debt burdens increase, it has become increasingly difficult for many high-cost oil and gas producers to survive. In September 2015, U.S. shale oil producer Samson Resources filed for bankruptcy protection, and it is expected that more oil and gas companies may follow suit. The latest data from oil services company Baker Hughes show that the number of oil drilling rigs in the United States has declined for six consecutive weeks. As of October 2, there were 614 such rigs, 26 fewer than the previous week, representing a decrease of around 59% compared to the beginning of the year. The data also show that the number of natural gas drilling rigs in the United States decreased by 2 to 195 compared with the previous week, representing a drop of about 41% since the beginning of the year. The total number of oil and gas platforms in the United States has dropped to its lowest level since May 2002. 2. Oil and gas production in the major shale regions has declined. In August of this year, U.S. crude oil production dropped by 512,000 barrels per day compared to 9.612 million barrels per day in April, which was the highest level in 40 years. Meanwhile, the drilling productivity report released by the EIA on September 14 indicated that the daily production of shale oil in the seven major shale regions across the United States would continue its downward trend observed in the previous months; it was estimated to drop to 5.206 million barrels per day in October, representing a decrease of about 79,000 barrels per day compared to September. Gas production in the seven major shale regions in the United States is also showing a downward trend. The EIA states that the output from new wells in each region is not sufficient to compensate for the decline in output from existing wells; as a result, natural gas production in the seven major shale regions is declining. U.S. shale gas production is expected to experience four consecutive drops starting in October. Since the success of the shale gas revolution in 2007, natural gas production in the United States has experienced rapid growth, with an average annual growth rate of 4.21%; by 2014, natural gas production reached 728.3 billion cubic feet. In the first half of 2015, U.S. natural gas production increased by 27.7 billion cubic feet, accounting for 64% of the increase in natural gas production seen in 2014. It is expected that the growth rate of U.S. natural gas production in 2015 will slow down compared to 2014. Persistent low oil prices will lead to a further slowdown in the growth rate of U.S. natural gas production; the EIA predicts that U.S. natural gas production will increase by 1.9% in 2016, reaching 783.7 billion cubic feet. 3. The United States will become a net exporter of natural gas. The U.S. is a major producer of natural gas as well as a major consumer; it still needs to import a certain amount of natural gas each year to meet its domestic demands, primarily by importing it through pipelines from Canada. At the same time, a portion of natural gas is exported to Canada and Mexico via pipelines each year, and there is also some LNG trade. The rapid growth in natural gas production has led to a gradual decrease in the United States’ demand for imported gas. In terms of pipeline gas imports and exports, in 2014 the United States imported 32.2 billion cubic meters of pipeline gas netted, of which 52.8 billion cubic meters were imported from Canada; this represents a 44% decrease compared to 2007. The limited growth in Mexico’s natural gas production, coupled with the increasing demand for natural gas in the country’s power generation sector, along with Mexico’s proximity to U.S. shale gas production areas, all facilitate U.S. exports of pipeline gas to Mexico. With the commissioning of several new natural gas pipelines this year, the United States’ export capacity to Mexico has been further enhanced. In the first half of 2015, the United States exported 13.1 billion cubic meters of pipeline gas to Mexico, a 33.5% increase compared with the same period the previous year. It is expected that the net import volume of pipeline gas to the United States in 2016 will decrease by another approximately 15.7 billion cubic meters compared to 2015. In terms of LNG imports and exports, since 2010, the 48 states in the United States have submitted 53 applications for LNG exports. As of August 2015, the U.S. Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC) had approved a total of 14 applications for exporting LNG to countries with which the United States does not have trade agreements; the combined export capacity resulting from these approvals was 14.48 billion cubic feet per day (approximately 149.6 billion cubic feet per year). In 2014, the global LNG trade volume was 333.3 billion cubic feet. At the same time, several energy companies are upgrading existing LNG receiving stations for export purposes or building new LNG export terminals. Cheniere Energy’s Sabine Pass project in Louisiana is the third LNG export terminal to receive approval for selling U.S. LNG to non-free trade partners; it will be completed this year and begin delivering LNG to Europe and Asia. Cheniere Energy plans to export its first shipload of LNG in December this year. As U.S. imports decline and demand for natural gas exports rises significantly, the EIA predicts that the United States will become a net exporter of liquefied natural gas by 2015, and a net exporter of natural gas by 2017. It is estimated that in 2016, the net export volume of LNG from the United States will be around 6.6 billion cubic meters. 4. Growing demand for domestic natural gas: In 2014, the United States consumed 755.5 billion cubic feet of natural gas, of which 30.5% was used for power generation, accounting for the largest share of natural gas consumption; followed by the industrial sector, which accounted for 28.6%. The latest short-term energy report by EIA predicts that U.S. natural gas consumption will reach 787.6 billion cubic feet in 2015, with a slight increase on that figure in 2016. The growth in natural gas consumption is expected to come primarily from natural gas power generation, followed by industrial use. The low levels of natural gas prices, along with the need to reduce emissions in order to address climate change, are both favorable factors for the natural gas power generation industry. In the first half of 2015, natural gas accounted for 30.3% of the total installed power generation capacity in the United States, with natural gas-based power generation increasing by 18.4% compared to the same period the previous year. The EIA predicts that this year, the use of natural gas for power generation in the United States will increase by 15.6% compared to the previous year, resulting in an additional demand for around 36 billion cubic feet of natural gas; however, this growth rate is expected to decline by 2.1% in 2016. It is expected that U.S. natural gas consumption in industrial applications will remain on par with that in 2014 this year, while with the commissioning of new projects such as those using natural gas for fertilizer production, this figure is projected to increase by about 4.2% in 2016, resulting in an additional demand of 9.1 billion cubic feet of natural gas. Furthermore, consumption of natural gas for residential and commercial use in the United States is set to decline over the next two years. 5. Forecast for natural gas price trends: Currently, the overall number of natural gas wells in the United States is declining less than expected, and the increase in supply still far exceeds the growth in demand. The latest data released by EIA show that as of October 2, 2015, the United States’ inventory of working gas amounted to 102.9 billion cubic feet. This represents a net increase of 2.7 billion cubic meters compared to the previous week, and an increase of 12.5 billion cubic meters compared to the same period last year; it is also 4.4 billion cubic meters higher than the average level over the past five years. In the short term, the surplus of natural gas supply in the United States will not be resolved, and natural gas prices will remain low. In the long term, the persistent low levels of international oil prices will exert a strong restraining effect on the growth of U.S. oil and gas production. Meanwhile, weak demand for natural gas in countries such as China, along with the restart of nuclear power plants in Japan, which reduces the demand for LNG, will hinder the smooth expansion of U.S. LNG exports. The gradual increase in natural gas exports, along with rising demand for natural gas in domestic power generation and the chemical industry, will lead to increasing tension in the supply and demand of natural gas in the United States. Yahua Consulting believes that, based on the costs of major oil-producing countries around the world, an international oil price below $50 per barrel is unsustainable. As international oil prices return to more reasonable levels in the future, U.S. oil and gas production is set to recover rapidly, which will also benefit the country’s LNG exports. It is expected that the substitution of natural gas power generation for coal-fired power generation will slow down over time, while the use of renewable energy in power generation will continue to increase. The operation of natural gas chemical projects will become a key driver of growth in domestic natural gas demand in the United States. Yahua Consulting believes that in the future, the balance between supply and demand for natural gas in the United States, as well as prices, will depend to a large extent on the development of actual LNG exports. An increase in natural gas exports and rising domestic demand will push U.S. natural gas prices into an upward trend. With the continuous improvement in production efficiency, as well as natural gas condensate helping to reduce the costs of dry gas, Yajia Consulting believes that there is limited room for an increase in U.S. natural gas prices in 2020, and the U.S. will still maintain a relative advantage in the international natural gas market. At the same time, Yaha Consulting believes that the development of LNG exports in the United States, along with an oversupply of liquefied natural gas on the international market and resulting price drops, will lead to more flexible and reasonable long-term contract pricing structures. This will help reduce the differences in international natural gas prices, which will undoubtedly benefit international buyers facing high gas prices, including China. 6. Natural gas-based methanol in the United States remains competitive. In September 2015, Shandong Yuhuang Chemical Company officially launched the construction of a large-scale methanol project in Louisiana, USA. The total investment for this project is $1.5 billion, of which Yuhuang is responsible for $1.2 billion. The project is located on the banks of the Mississippi River, adjacent to the Plains All-American pipeline terminal and along the Union Pacific Railroad. It is reported that the first phase of the project will come online after 3 years, with an annual production capacity of 1.8 million tons of methanol; the second phase aims to double this capacity. Since Yihua Consulting first became aware of this project in July 2014, YCI’s U.S. subsidiary has obtained multiple permits, acquired 1,300 acres of land, completed the preliminary design and front-end engineering design (FEED), and signed various agreements for engineering and technical services as well as gas pipeline transportation. The project is favored by the local authorities because it can boost employment and increase tax revenues. Wang Jinshu, chairman of Yuhuang, said that the products from the large-scale methanol project will be exported to China to meet the country’s demand for methanol. If the predictions regarding future increases in U.S. natural gas prices and a gradual narrowing of the international price gap come true, it is likely to raise the production costs of U.S. natural gas-based chemical industries, including the Yuhuang methanol project, and weaken their international competitiveness. Based on the analysis in the previous section, we know that a decline in competitiveness does not mean that the advantages of the U.S. in natural gas chemicals will disappear entirely. For projects like Yuhuang that target the Chinese market, let’s take a look at their room for survival. According to the predictions and analyses of China’s methanol market presented in Yahuazhengxun’s latest \"Quarterly Report on Olefins Production from Coal (Methanol), Q2,\" the new methanol production capacity in China in the future will mainly come from integrated coal-to-olefins projects. The methanol produced in these projects serves as an intermediate product and does not enter the market; therefore, the growth in methanol production capacity that can be sold in the market is limited. On the demand side, by examining the production status and development trends of various downstream products of methanol, Yaja Consulting believes that coastal MTO projects will provide strong support for methanol consumption. The supply-demand gap for methanol in China is set to widen gradually, exceeding 23 million tons by 2020, indicating a huge potential in the methanol import market. The methanol production capacity brought online in the United States in recent years will primarily be used to meet domestic demand, with Yihua Consulting predicting that large-scale methanol exports will emerge after 2018. By then, international oil prices will gradually return to reasonable levels, and at the same time, the capacity of China’s coastal MTO projects to withstand methanol price fluctuations will also increase. In any case, U.S.-produced natural gas-based methanol will become an important source of raw materials for China’s MTO industry. With the support of sufficient and reasonably priced methanol feedstock, MTO will compete alongside coal-to-olefins (CTO), naphtha-to-olefins, propane dehydrogenation (PDH), as well as potentially ethane cracking to produce ethylene in the future. http://www.chinacoalchem.com/news.asp?id=60530