HOUSTON—Natural gas prices are primed for a recovery as LNG plants are commissioned and exports to Mexico ramp up, Sidley Austin LLP partners said at a roundtable discussion on Jan. 10.
“Sometime by 2020, we’ll have up-and-running LNG export capacity from the United States of something on the order of 15 Bcf [billion cubic feet], 18 Bcf, maybe 20 Bcf a day, which is a significant number,” said Jim Rice, co-managing partner of the global law firm’s Houston office, whose clients operate several plants in various stages of construction and operation. “It would support my thesis that maybe we’re in for a recovery in gas prices within the next few years, a recovery for real.”
Partner Irv Rotter, co-leader of the firm’s global energy practice, agreed, but noted that long-term success of U.S. LNG would depend on the quality of off-takers as well as trade policy.
“If you’re looking at long-term off-takers, the capital markets have generally been looking at single-A credits or above,” Rotter said. “One of two things is going to have to happen. Either there is going to be an increase in demand so that those off-takers continue to have needs that they need to satisfy, or there has to be development of an emergent market.”
But Rotter also expressed concern about protectionist sentiment that popped up during the presidential election.
“The incoming administration has talked about the fact that they would like to expand exports and one the key areas is fossil fuels, either LNG or oil,” he said. “To the extent that we increase production and we are able to generate those exports, they will be able to implement that policy.
“The countervailing issue is going to be, to the extent that the incoming administration has talked about having protectionist policies, whether there will be some action taken against U.S. exports as it relates to energy products. That remains to be seen.”
Read: Sale On: Exports And The Future Of Energy
Statements made during the campaign also potentially raised tensions with Mexico, including disparagement of the North American Free Trade Agreement (NAFTA).
Ken Irvin, Washington, D.C.-based partner who has worked with Mexico’s Comisión Federal de Electricidad (CFE, translated as Federal Electricity Commission), on construction of pipelines to move natural gas from the U.S. to Mexico to fuel power generation plants, acknowledged the risk but stressed the many positives that the energy trade with Mexico brings.
“The United States is getting the opportunity to find incremental demand for a market that will allow us to build infrastructure, build much more connectivity to resources in the Permian and the eastern side of Texas,” he said. “It will have its economic impact felt all the way up into the Marcellus.”
Read: Mexico’s Energy Reform: How Howard Energy’s Projects Define Success
Midstream Audio: Going With Flow To Mexico
And the benefits are mutual. Irvin noted that record high temperatures last August resulted in electricity prices that were $10 per megawatt hour higher in northern Mexico than in Texas. The cheaper, reliable supply of natural gas also provides an opportunity for Mexico to develop a nodal market like ERCOT in Texas and PJM in the Northeast.
Ultimately, Irvin cites the view from Rice University’s Baker Institute that U.S. natural gas resources provide a tool of foreign policy strength. “There are a lot of Eastern European countries that would love to have access to our gas market,” he said.
The pro-trade voices in the incoming administration will eventually gain the upper hand in policy because of the positives, he believes.
“Call me an eternal optimist,” Irvin told Hart Energy. “I appreciate that there are conflicting signals that can be picked up on the nightly news, but there’s too much upside in using what we have available, which is not just mineral but a whole system of how we developed this—the legal system, the economic system to help our interests worldwide—to let it go by and miss out on it.
“Mr. Trump is advised by people who have been steeped in this for a long time, to wit, the secretary of state,” he said. “I think these issues will play out in a way that allows us to be rational actors with regard to economic development of our resources.”
Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.
