Hello, this is Michael Roomberg, Portfolio Manager and Analyst at Miller/Howard Investments.
The Natural Gas Macro
In January 2018, China and the New England region of the United States, both faced dramatic shortages of natural gas. China’s shortage was caused by government rules that recently went into effect banning coal for industrial and residential heating, that instead required consumers to burn gas. In China, gas infrastructure was built too quickly, and not enough gas could be supplied to meet this new demand. One benefit of this transition, however, is that Northern China’s air quality is the best it has been in nearly a decade because cleaner burning gas is displacing coal. China’s aggressive actions are likely to spread throughout the country, as the benefits of cleaner air are very popular, and therefore difficult to reverse. Over the next several decades, we see demand in China, India and other countries around the world for natural gas, the cleanest burning fossil fuel, to more than double. On gas exports there is no change in our view—it’s all happening! US shale resources will emerge as the largest provider of natural gas to these regions, and the benefits and opportunities will be felt along the entirety of the value chain.
In contrast (to China’s problems), in New England, the exact opposite problem caused the gas shortage in January of 2018. Years of environmental and local pushback have led to a shortage of natural gas pipelines to transport inexpensive Marcellus and Utica shale resources into the region during periods of extreme cold. As a consequence, gas prices for home heating and electricity generation in New England rose to between 60 to 100 times (and as much as 175 times in the case of New York according to Con Edison!) the prevailing spot price for Henry Hub, placing a tremendous burden on local ratepayers, as well as the environment. Why the environment? During the peak of the cold, New England was forced to generate nearly 1/3 of its power from burning oil, which is among the most highly pollutive electricity generation sources. Meanwhile, in the rest of the country where infrastructure has become more plentiful, the fact that natural gas prices never rose much above $3.00/mmbtu is testament to the abundance of shale. Prior to the shale revolution, these shortages would not have been confined to New England in such a widespread, severe cold snap.
These examples are just a few of the latest that underscore the fundamentally bright future for natural gas as a bridge fuel—one that has no commercially viable substitute at the current time. Whether its coal plant replacements, LNG exports, exports to Mexico, petrochemical manufacturing, or transportation (gas-based electricity powers more Tesla batteries than any other source, for example), there is no shortage of growth opportunities in front of natural gas, and all the companies that work to find it, produce it, transport it, process it, fractionate it, and use it to power our everyday lives.
