As anyone pulling into a gas station can attest, fracking has dramatically changed the American energy market. The development of new hydraulic fracturing and horizontal drilling technology allowed domestic producers to access deposits of oil previously thought to be unexploitable, increasing the supply of oil on the market, and helping to push prices down. What is less visible is the effect fracking has had on natural gas. With the development of the Marcellus Shale as well as fields in Arkansas, Texas, and other parts of the West, the U.S. leads the world in natural gas production. Alongside the increased production has come increased use, meaning that so far, the impact on trade has been localized. However, this may change in the future.
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Natural gas has hovered at tantalizingly low prices for several years. This has effected not only on electricity prices, but also affects trading relationships with many different countries. This has come to the forefront in early 2017. According to statistics released on Tuesday by the Energy Information Administration (EIA), the U.S. became a net natural gas exporter for three out of the first five months of 2017.
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This is the result of a growth in exports to Mexico through pipelines in Texas, Arizona, and California, in conjunction with shifts in the trade relationship with Canada. Exports to Mexico “reached near-record levels in the first five months of 2017,” the EIA found, the result of market pressures encouraging the use of American natural gas for electricity generation and industrial use in Mexico, and the expansion of pipeline networks in the area. This includes the Trans-Pecos pipeline, which went on line earlier this year, despite efforts by protestors to halt construction.
America has been an annual net exporter of natural gas since the late 1950s. However, it still imports billions of cubic feet of natural gas from trading partners, particularly Canada. Canada remains the largest trading partner of the U.S. with regards to natural gas and is also the primary source for American natural gas imports.
These imports primarily go to the Mountain West, which is closest to the energy-producing regions of Alberta. Since 2003, the trade relationship between the U.S. and Canada has shifted from a growth of imports to a surge of exports as the development of the Marcellus Shale replaced Canadian energy with American supplies.
Few things exemplify the switch in the trading partners’ statuses as well as pipeline reversals. Over the course of the last five years, energy transportation companies have begun the process of reversing the direction of gas flow in pipelines running between the U.S. and Canada. In 2011, TransCanada, the operator of the largest energy pipelines in Canada, reversed the direction of its Niagara pipeline to take advantage of the flood of cheap shale gas. Since then, several other pipelines have also been reversed.
The growth in American natural gas production is already affecting energy markets around the world. With the development of the Marcellus Shale fields in Pennsylvania, central Ohio is poised to become a new hub of chemical manufacturing. Natural gas, which cracker plants can further refine into the hydrocarbons needed to manufacture plastic, is becoming cheap enough in the U.S. to threaten the profitability of plants in Europe. Rather than building overseas, companies like Royal Dutch Shell are instead expanding in the U.S.
Some European countries are even beginning to consider if liquefied natural gas from the U.S. could help break the stranglehold Russia’s Gazprom currently has on the energy market. Pipelines from Russia currently supply 55 percent of the natural gas used in Germany and more than 80 percent in Belarus, Estonia, Latvia, Slovakia, Greece, and Austria. In the past, Russia has threatened to cut off supplies of gas in midwinter if Eastern European countries did not agree to price increases.
Sanctions could complicate the relationship by hitting the Nord Stream 2 pipeline, currently under construction between Germany and Russia. Gazprom currently supplies about a third of the natural gas used in Europe at a price of around $5 per MMBTU. Meanwhile, the U.S. gas price is about $2.85 per MMBTU. The trouble is getting the gas across the Atlantic. Additional shipping costs to liquefy and transport American gas raise the price to more than $6 per MMBTU.
Still, the price is close enough to make observers curious. Energy analysts say that American LNG would not be enough to fully replace pipeline supplies from Russia, but could provide flexibility to the market. This is the reason why countries like Lithuania and Poland, which rely on Russian pipelines for the majority of their natural gas, are eager to have another option on the table.
“Gas can now move where you need it in the world. That’s the biggest challenge for a company like Gazprom,” Charif Souki, head of energy group Tellurian, told the Financial Times.
American natural gas is on the move, not only to Canada and Mexico, but potentially across the Atlantic.
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