In California, which is dealing with a unique set of challenges that include a scarcity of hydro power and summer-driven demand for electricity to run air conditioners, prices already are surging. Gas traded at the Southern California border reached $7.40 last week, while in the Los Angeles area it was almost $11, according to OTC Global Holdings LP.
U.S. gas output is only expected to rise by 1.1% during the second half of this year compared with the first six months, the Energy Information Administration said on Sept. 8. The residential, commercial and industrial sectors all will burn more gas this year than last, although overall demand may slip by 0.9% as soaring prices for the fuel prompt some electricity generators to switch to coal, according to the EIA. READ MORE: Europe’s Energy Crisis Is Coming for the Rest of the World, TooEven if an unexpected spell of mild weather frees up some U.S. supplies in coming months, gas exporters will almost certainly shun Europe and instead ship those cargoes to Asia where prices are higher, said Anna Mikulska, an energy-studies fellow at Rice University's Baker Institute of Public Policy in Houston.
“Europe can't lean on the U.S. for gas this winter,'' said McLean of BTU.
`Winning the Arbitrage’
As alarming as $7.40 gas is to U.S. buyers, prices in Europe and Asia are magnitudes higher: A key gas-import benchmark for Japan and Korea is approaching $30, while Europe is seeing the fuel command the equivalent of $25.
Citigroup Inc (NYSE:C). warned prices may hit $100 during the final three months of the year as power producers, utility companies and manufacturers around the northern hemisphere vie for supplies. That’s more than double the bank’s previous forecast.
Those regional price dislocations also explain why any spare gas that American drillers manage to eke out this winter will probably head for Asia aboard liquefied gas tankers rather than remain home or traverse the Atlantic Ocean to Europe.
“Asia is winning the arbitrage,” said Rice University’s Mikulska. READ MORE: Energy Crisis Puts World’s Most Ambitious Climate Plan to Test
On the supply front, drillers haven’t responded to this year’s price gains by increasing investment in new North American discoveries because earlier this year they hedged most of their expected 2021 output, which locked them into selling supplies at lower prices, said Raoul LeBlanc, North American shale analyst at IHS Markit Ltd.
Management teams also have little incentive to expand output after investor pressure to focus on financial returns and debt reduction prompted boards of directors to remove production-based metrics from compensation packages, said BTU’s McLean.
“Shareholders have been very clear that that money is theirs and they don’t want them to spend it on growing supply,” LeBlanc said.
Then there are the temporal and physical barriers.Anyone erecting a rig and beginning to drill a gas well today can’t realistically hope to see any fuel begin to flow for five or six months -- or longer, depending on the jurisdiction. And with domestic liquefaction plants that prepare gas for shipment overseas already running close to full capacity, there’s no room to export more fuel even if supplies were on hand, according to Rystad Energy Vice President of Markets Sindre Knutsson.
“Gas producers looing at the strong forward curve really don’t have time to bring any new supplies online before the end of the winter,” said Jen Snyder, a managing director at research house Enverus.
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