Major Factors Of Onshore Production

Q. Why did the man fall into the well?

A. He didn’t see that well.

Makes us laugh every time.

On the theme of wells, as you have read in our recent posts, oil producers continue to drill, baby, drill. That brings online the usually valuable, but sometimes nuisance issue of natural gas and how to get it to market. Again, if there is no pipeline to take away the gas, producers have very few options with what to do with that gas. Oil in the $64 range at WTI inspires a lot of oil drilling, leaving some producers in natural gas pipeline-constrained regions stuck with natural gas and the penalties related to not being able to move it out of the region.

Changing gears before we tie it back together.

A quick primer on LNG and North America import fundamentals

A significantly bullish development in the North American natural gas market is our recent and growing ability to bring natural gas to a shiny new $50 billion facility built on one of our coasts, supercool it until it changes to a liquid state, thereby reducing the space needed to transport it.

Gas, when converted to a liquid state, uses only 1/600th the space of the same molecules in their gaseous state. This means we can move an economically feasible amount of gas on a boat that actually fits in a harbor.

Multiple LNG facilities have recently been completed, added onto or built from scratch, meaning that the U.S. has the ability to export 4.1Bcf/day of our gas production to end users typically in Europe and Asia. That represents a significant 4.5% of US production. This percentage could be double that by the mid-2020s!

These mammoth $50B projects were funded and developed when the spread between U.S. natural gas and foreign natural gas made it extremely compelling for our LNG facilities to ramp up into full-on export mode.

More recently, due to multiple geopolitical issues, including Russia flooding Europe with their own natural gas, the foreign price is only marginally compelling to our LNG exporters. We will continue to monitor this situation.

Ultimately, if U.S. LNG doesn’t make it to the export markets, the U.S. will increase the already massive surplus that has been created due to typical production increases and the bonus increase of natural gas created by the boom in US oil prices.

More on this and its impact on oil royalties in the coming weeks.