The Fundamental Case: The Great Gas Debottlenecking
Gas Infrastructure Opportunities in the Permian
We continue our Gas Infrastructure Series today and take a look at one of the three key fundamentals driving profitability growth for energy producing and infrastructure companies.
Focus will be on the latter with exposure to Permian. We’ll use this framework to underpin our bull case for gas infrastructure stocks in the long-term.
For the sake of keeping these posts to a reasonable length, we broke The Fundamental Case into three separate posts - one for each driver.
Today we dive into the 3rd driver: The Great Gas Debottlenecking
We’ve already covered:
Today we cover:
LT Driver: The Fundamental Case: The Great Gas Debottlenecking
What we’ve yet to cover:
LT Driver: The Political Backdrop
5 stocks to benefit from the execution of each driver
LNG capacity will drive significant US gas demand
The U.S. has more LNG export capacity than any other country in the world. Even more than the gas-rich nations of Russia, Iran, and Qatar – all of whom make up *half* of the world’s total natural gas reserves!
Despite the U.S. leading the world in LNG export capacity, there’s still much more land-locked gas waiting to make its way to seaborne vessels.
This dynamic is the primary reason a lid has been kept Henry Hub prices – the U.S. gas benchmark – compared to international prices, which have seemingly traded in a world of their own.
Eventually, free markets will find their way to close the arb (premium).
If you’re a gas producer, would you sell to a US power generator for $7/MMBtu – or would you sell to a European utility for $30/MMBtu? All-in costs (transport, liquefaction, boil-off etc.) are $1-2/MMBtu.
Of course you’d sell to the European utility!
BUT
currently you don’t have a choice.
There’s no infrastructure that’ll get your gas to the international utility co. Your next best option is to sell into a saturated gas supply market - to the US power generator.
Natural gas is *bottlenecked* in the US.
Some reasons for this US gas supply saturation include:
a lack of LNG export capacity
higher gas-to-oil ratios in key shale regions
increased drilling activity in the Haynesville
But all good things (low gas prices) must come to an end.
The enormous spread between domestic and international gas prices will eventually tighten. The market has been incentivizing LNG operators to FID their facilities to take advantage of the opportunity (spread).
This will lead us to…
The Great Gas Debottlenecking
As LNG facilities begin entering service in 2024, the great Permian + Gulf Coast debottlenecking will take place.
Implications? A tighter spread between Henry Hub and international gas prices by 2025.
This means higher Henry Hub prices and lower TTF/JKM prices. The spread will then look similar to the Brent/WTI spreads we see today, where Brent trades at WTI prices + the cost of transportation, on average.
These are the LNG facilities to keep an eye out for that’ll kick-off the Great Gas Debottlenecking:
Golden Pass
2024e - 2.4 bcf/d capacity (3 trains @ 0.8 bcf/d each)
Plaquemines LNG Phase 1
2024e – 1.8 bcf/d capacity
Corpus Christi Stage III
2025e - 1.6 bcf/d capacity
By 2025 LNG capacity would have increased by 40%! That’s another 5.7 bcf/d hitting international waters! Alone this would be enough to fulfill 2/3 of the U.K’s gas needs.
The implications are undeniable.
This natural gas release valve will eventually tighten gas spreads and make U.S. gas customers officially compete with Europe and Asian customers for the beloved hydrocarbon molecule.
This dynamic and high-confidence forecasts were discussed in greater detail in our earlier piece, The Event-Driven Trade.
Who Will Benefit?
Back to the opportunity at hand - those exposed to U.S. gas prices and volume in the Permian, Haynesville or Gulf Coast will directly benefit from this trend.
Though Henry Hub prices are likely to remain subdued in the near-term, ever-increasing volumes will work its way through midstream infrastructure pipes and other facilities, collecting a $ fee for each MMBtu pushed through its systems.
LNG operators will be securing long term supply agreements with producers.
Producers will be securing the increasingly-scarce transportation capacity to ensure LNG operators receive their product.
Filtering, treating, and storing the gas stream ahead of long-haul transport is essential. This means more throughput for gas processors, NGL fractionators, salt-dome storage caverns etc.
We will do a deep dive on these companies soon. But here’s a recap of some of our favorite names to capitalize on this trend and their respective exposure to gas midstream infrastructure.
Permian gas gathering & processing, NGL transportation, Gulf Coast LPG exports & NGL fractionation
Gas transportation (Permian, Appalachia, Mid-Continent, Gulf Coast)
Gas Transportation (Transco, Gulfstream), Appalachia & Mid-Continent gas gathering & processing
Gas & NGL transportation, storage, processing, exports (Permian, Gulf Coast, Mid-Continent, Appalachia)
Gas, NGL & petrochemical transportation, gathering & processing, fractionation, exports (Permian, Haynesville, Gulf Coast)
Gas & NGL transportation, gathering, processing, fractionation (Mid-Continent, Gulf Coast)
Recap: The Three Key Drivers for the Fundamental Case for Gas
Converting all global coal plants to natural gas would increase demand by 172 bcf/d, or 27%
It would also reduce CO2 emissions by 20% - BY FAR the lowest hanging fruit when it comes to decarbonizing the grid
Of course it’s unlikely 100% of coal plants are converted/replaced by natural gas, but even a *small* percentage of this would have momentous impacts on the sector
By 2050 it’s projected that 662 million new EVs (vs. 15 million today) will hit the roads
This would translate to an incremental 41.6 bcf/d increase in gas demand
The assumptions we use here could be considered conservative, given the EV penetration of 69% by 2050 does not align with Net Zero projections
The Great U.S. Gas Debottlenecking
By 2025 LNG capacity would have increased by a staggering 40% (+5.7 bcf/d)
The impact on Henry Hub prices is significant
Domestic (Henry Hub) prices will begin to close in on international prices as US gas consumers would now have to compete with Asian and European pricing
As you can see, coal-to-gas switching provides the greatest and most impactful low-hanging fruit of the selected drivers. They do vary by location however. Say the U.S were to ramp their EV production faster than other countries (see: Inflation Reduction Act) then it would surely have an outsized impact on the results of its upstream derivatives (i.e: natural gas-exposed stocks).
In the next piece of our series, we walk through the impact that the political backdrop will have on Permian and Gulf Coast gas infrastructure stocks (among many others).