The Peter Zeihan Podcast Series - US Natural Gas and Global Energy Supplies || Peter Zeihan

Episode Date: January 24, 2024

Today, we're looking at the US natural gas market based on energy data from 2023. The US natural gas market was remarkably stable in 2023, so being the world's largest producer and exporter of natural gas has its perks. Full Newsletter: https://mailchi.mp/zeihan/us-natural-gas-and-global-energy-supplies

Hey, everyone, Peter here coming to you from flat on my back in bed because I threw out my back. I hope this is the last one I record from here. We have a data update from the U.S. government, specifically the Department of Energy's Energy Information Agency, which tracks energy production, usage, and prices and everything. And their data for calendar year 2023 indicates that the average price for natural gas in the country was just over $2.50 for 1,000 cubic feet. In fact, it bottomed out at just below $2.2.2. 20 cents in May. And this is after a really volatile year in calendar year 2022 when because of the

Ukraine, oh yeah, Katzis hello. We're because, we'll just do that. Where because of Ukraine war, there was high demand everywhere and everyone was trying to get away from Russian natural gas.

In that calendar year, U.S. prices hit nearly $10, but that was nothing compared to what happened in the rest of the world, with prices for several months being above 50 and even approaching a hundred a few areas which still boggles my mind that we actually hit those numbers. Anyway, 2003 was much calmer. And the reason for it is twofold.

Number one, the United States is not just a producer and exporter of natural gas, but it does so using a series of technologies that are broadly not applicable in the rest of the world. The shale technology is fracking. Because of this, the United States has a break-even price in our pure shale, Natural gas fields typically below five and some places below $3 per thousand cubic feet. And second, we get a lot of associated natural gas production that comes from our shale oil operations, which, you know, technically, based on how you're running the numbers, that could be free. Anyway, it means the United States is the world's largest producer of natural gas kicking out about 120 billion cubic feet per day or 1,200 billion cubic meters per year. And most of that is trapped in the system at home because moving natural gas from A to B is kind of difficult.

There's really only two routes. One is to have a pipeline network that sends it from production to consumption locations. Usually those are within individual country because natural gas, being a gas is hard to store. And the U.S. does have the world's largest system for distribution by far. The second option is to chill it down to negative 300-odd degrees into liquid form and then put it in a onto a specialty tanker to send it across the ocean to someone who has a specific receiving facility who can take the liquid and regassify it without it blowing up. All of that is as expenses as it sounds. So what happened in 2022 in Europe was the Europeans used to be on a

piped system that brought in stuff from northwestern Siberia for the most part, and that gave them access to reliably large and reliably cheap supplies. So when the Europeans decided to move on from the Russians, they had to go to some other piped suppliers that they have, specifically Algeria, Libya, and especially Norway, but that wasn't enough. So they had to go out and tap the world for liquefied natural gas, which is not available in large volumes in the way that piped gas from a neighbor can be. And so prices went up and up and up and up. And in the United States, we sent everything that we could. And that allowed the Europeans a degree of energy security, but only at a very, very high price point.

What we're seeing now is the slow motion, so far slow motion, degradation of the Russian system because their pipes are all oriented towards Europe, and they are falling into disrepair because they're not being used, and the Russians are using all their technical experts to maintain their war effort. They do have a couple of liquefied natural gas facilities, some in the far east on the island of Soklin, north of Japan, and some on the Amal Peninsula in far northwest of Russia. but it is foreigners who provide the technical skills for those facilities to operate. And as those technical skills are increasingly withheld, these facilities will fall into disrepair. And, well, let's just say when you've got a refrigeration unit that is dealing with billions of cubic of meters of flammable materials and something goes wrong, something goes wrong all at once.

We haven't had any industrial accents at these facilities yet. But it's only a matter of time when a year, two year fibers. I don't know how long before those facilities go offline, and then Russian natural gas will be gone. Getting it out by other means is nearly impossible. There are very few countries that can do LNG liquefaction. China is not on that list. Most of them are part of the Western Alliance plus Japan that is back in Ukraine. And if you're going to send a pipeline from the Royal Peninsula to populated China,

you're talking about the world's largest chunk of infrastructure with roughly 70% of the train that's going to cross being virgin with no existing infrastructure at all. So you're talking tundra and tegai and permafrost and mountains. Building that pipeline would be a $100 billion project. It would take a minimum of 15 years. And even if it was done, the cost of operating would be two, three, four times as much as the natural gas would be worth. So the Russians and the Chinese have repeatedly said that this pipeline is going to happen. They've been saying that for 20 years.

And then you get down into the details and the Chinese are going to pay for the operation of pipeline. And the Russians are like, yeah, the Chinese are going to pay for the operation of the pipeline. And that's why nothing has started. So the world has to get by without Russian natural gas. And until a year and a half ago, they were the world's largest exporter. That is going to have big price implications everywhere except in countries that produce natural gas for themselves. Read the United States. Now, that means in the United States, the $2 to $3 range we're in right now is more or less normal.

We're not going to go above five for any more than very short periods of time. because what we've discovered is that the shale gas guys can bring on wells in a matter of weeks. If you remember your shale history back between 2004 and 2011, roughly, it was all about the natural gas. And then in 2011 to 2013, oil really came into its own. And natural gas faded, not because we were producing it, but because we were producing it as a byproduct of oil production. What we saw in calendar year 2023 when prices were going up is that the shale guys went back to the old natural gas fields and were able to produce using the tricks they'd learned in the shale oil field the last 10 years. And that pushed down the cost of production and pushed up

the volume of natural gas that was produced by massive volumes. And we basically got back to a balanced market. Now, the United States does have takeaway capacity to get some of that natural gas to international systems. We have roughly 10 billion cubic feet of pipeline capacity, mostly in Mexico and about another 10 billion cubic feet for LNG, which is mostly going to Europe now. That's in comparison to 120 billion cubic feet of overall production, which is a number we now know that we can increase in fairly quick succession when we need to. So again, prices should be lower for longer. We might have those occasional spikes, but then the shale guys will just drill and bring the price right back down. Now, why does that matter to you? Three big reasons. Number one,

Natural gas remains the number one fuel source for electricity generation in this country, about 40% of the total. So anything that requires electricity, which is almost everything, natural gas is the solution, at least in the midterm. And since the United States needs to roughly double the size of its industrial plant, as the Chinese fade away, we basically need 50% more electricity. Natural gas is going to be a huge component of that. Second, let's say you don't like fossil fuels at all.

Let's say that you're greening, you like solar and wind. Well, you should still like natural gas. Because when the wind doesn't blow or when the sun doesn't shine, which happens, you know, every night, you need a partner of fuel in order to keep the lights on. And natural gas combined cycle power generation facilities can spin up and spin down in less than 15 minutes. So they are the best partner for green tech that we have. And while the Californians don't like to say it out loud, about half of their energy that they generate within California,

California itself comes from natural gas specifically because of this pairing capacity. Batteries cost an order of magnitude more. They don't last very long, and they have some other problems with their construction that is ugly from any number of strategic and green points of view. Natural gas is a known. And as long as we're going to be moving towards wind and solar for most of this country, even in increments, natural gas is the logical partner for all of it. And then the third thing is a little bit more esoteric, and that has to do. with what happens in manufacturing once you decide you want to really get into everything. In globalization, we have broken up the supply chains. Energy comes from someplace, iron ore comes

from someplace someplace else, plastics comes from someplace else. It's brought together for assembly of different locations. As the world breaks apart, and we have a more national or continental system, more and more of those intermediate steps need to be done at home or near home. And a lot of those intermediate steps use raw materials that are made from natural gas. So natural gas makes naphtha, makes polyurethane, makes plastics. NAFTA makes fertilizers and pesticides makes agricultural products. Natural gas is the base material for a lot of this stuff. And now the United States is the largest producer, supplier, and exporter of all of those intermediate products.

And what we're doing now is the U.S. moving up the production chain, moving in a greater value-added production system for all of this so that we can still do the classic manufacturing and have the entire input system at home. So to have natural gas at these price levels for a very long time is great, and it's going to be a very long time. We largely stopped looking for natural gas about 10, 15 years ago because we knew at that time we had over 130 years of supplies at current rates of production. And we proved in 2023 that it's pretty easy to bring even more online. So this is going to be the norm for the United States while it goes through these massive re-industrialization phases. And natural gas will both power, fuel, and provide the base materials

to make all of it possible. And that is not going to be replicated anywhere else. No one else can produce natural gas at the price point that the United States can. And no one else has natural gas production facilities relatively close to their population centers like the United States does. So this is our new normal, and it's going to provide the bulwark for American industry for at least the rest of this century.