One Foot on the Gas, One Foot on the Brakes

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Market Share Or Margin?

I’ll never forget the time my paternal grandmother “Gunny” drove us into town. She had one foot on the gas pedal and one foot on the brakes. Her hearing wasn’t great and her eyesight was worse, but she refused to wear glasses. We finally came to a full stop in a bed of pachysandra beside her bank. When the bank manager rushed out to help she said, “That’s a fine place to put pachysandra.”

Well, the Liquefied Natural Gas (LNG) industry won’t end up in a bed of ground-cover for the second half of this decade, but it is likely to have one foot on the gas pedal (Qatar) and one foot on the brakes (U.S.) as producers struggle with an OPEC-like quandary: market share or margin?

One Foot On The Brakes.

The U.S. became the world’s largest exporter of LNG last year with Australia and Qatar receiving the silver and bronze medals. But the Administration’s decision in January to tap the brakes and place a temporary “pause” on pending approvals of LNG export projects (which could last a year) may soon change the medal order.

More supply than demand, and insufficient export capacity, has led to some of the lowest natural gas prices in 27 years. It’s also forced U.S. drillers to cut the number of operating rigs by roughly 30% since 2023.

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EQT (the nation’s largest gas producer) announced a production curtailment through March of roughly 18% “in response to the current low natural gas price environment resulting from warm winter weather and consequent elevated storage inventories.” And Nick Dell’Osso, the CEO of Chesapeake Energy (soon to be the nation’s largest gas producer after their merger with Southwestern Energy) said they were cutting production by nearly 30% in 2024 in response to very low natural gas prices.

I love his explanation: “The market is pretty clearly telling us it doesn’t need our gas today.”

One Foot On The Gas.

Qatar has the lowest unit cost of LNG production versus any other supplier in the world. And they’re looking to increase their long-term market share of the global market with a massive 85% increase in production capacity by 2030. I’m not sure what the translation for “pause button” is in Arabic, but it’s probably not in Qatar’s dictionary. They’re focus is on the long-game.        

What Does This Mean For Me?

Most of the propane that’s produced in America comes from natural gas processing plants. If the largest domestic gas producers are cutting production and their capital expenditures, you’d think that could impact propane production.

Maybe it will. But most of the natural gas production cuts are from “dry” gas wells which have less natural gas liquids (such as propane) than “wet” gas wells that are richer in NGLs. That’s because the current price environment for NGLs creates value for them. So, propane production shouldn’t be greatly affected by natural gas production cuts unless the price of NGLs drop significantly. And crude prices would probably need to move much lower for that to happen.

Ray Energy, New Mid-Continent Connections.

I’ve lived most of my life in the Northeast, but I began my career in the propane business 35 years ago in Minnesota. I still say “Uff Da!” at times, but I’ll never learn to like pickled herring. And I remember often calling into the office from a phone booth by the entrance to a small motel in the middle of nowhere. But every nowhere has a name and you may not believe me, but there’s an indescribable majesty to a thousand acres of corn, soybeans, or sunflowers stretching out as far as the eye can see. It’s largely co-op country, back in the days when a handshake meant something.

Well, Ray Energy has a fantastic new propane team in the Mid-Continent. They have a wealth of experience in the propane industry and they’re good people. So, please reach out to them. They’ll take good care of you!

The Skinny

Keep an eye on natural gas and crude prices: If Henry Hub stays under $2.00/MMBtu, we could see further natural gas production cuts that should mostly affect “dry” gas wells. But if WTI crude prices should fall below $70/bbl., we could also see natural gas production cuts from the “wet” gas wells that are richer in NGLs and that could adversely impact propane inventories.  

All of us at Ray Energy would like to welcome our new Mid-Continent team. I’m sure that many people reading this blog already know how wonderful they are, so when you have a chance, please make them feel welcome.

We’re also getting close to the 2024/2025 contract season, and we’re excited for the opportunity to keep growing together. As the Irish proverb says, “A good friend is like a four-leaf clover; hard to find and lucky to have.” Which means, we’ll always be there for you!

Thank you for making Ray Energy your propane supplier.

Happy St. Patrick's Day!

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