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2020 to be roughly 740 bcm—well below the EIA’s $110 range. With oil priced at current levels, ho-
2014 forecast of 770 bcm. wever, the breakeven price of wet shale-gas deve-
lopment projects has risen, reducing companies’
Supply incentive to drill (2).
The fall in oil prices will also lead to a lower supply With oil prices at current levels, the
of natural gas in the U.S. market, since oil and gas costs of many of these projects are
companies are likely to scale back development. now high compared with their expected
There are a number of reasons for this. One is that revenues, and it will take the industry
these companies’ current portfolios of upstream in- some time to adapt its cost structures
vestments were established when oil was priced at
$100 per barrel. With oil prices at current levels, the to the new pricing environment
costs of many of these projects are now high com-
pared with their expected revenues, and it will take Considering the demand and supply dynamics in
the industry some time to adapt its cost structures aggregate, it seems clear that a prolonged period of
to the new pricing environment. Until that happens, low oil prices would lead to a smaller U.S. natural-
investment activity will be curtailed. gas market. It would also limit the U.S.’s role as an
This situation will be exacerbated by the fact that, exporter of LNG, retard the development of natural
with cash flows from their currently operating oil gas’s role in the transportation sector, and reduce
fields shrinking, oil and gas companies have less the price competitiveness of U.S.-produced natural
cash to invest. This will force them to be increa- gas on the global market. There are two factors,
singly selective in the investments they do make, however, that could influence the competitiveness
and projects with relatively high breakeven pri- of U.S. LNG exports and ultimately keep U.S. ex-
ces, which would include some gas-development ports competitive even in the face of an extended
projects in the current environment, could be dela- period of low oil prices. The first is the ongoing
yed or canceled. advancement of shale development technologies
Further, a relevant share of natural-gas production in the U.S. The second is the opening of the new
in the U.S. comes from wet reservoirs. The relati- Panama Canal, which will reduce transportation
vely high value of the natural gas liquids (NGLs) that costs from the U.S. East Coast to the Far East.
these reservoirs produce has been a core source
of profitability for the energy industry over the past
several years, when oil prices were in the $90-to-
Fig. 2 – Asian natural-gas price references reflect the drop in oil prices
(1) if crude-oil prices remain at their current level
MMBtu = million British thermal units; LNG = liquefied natural gas; the reference used for northeast Asian spot prices is
spot prices of northeast Asian LNG delivered ex ship
(source: Argus; Japan Customs; BCG analysis)
Impiantistica Italiana - Maggio-Giugno 2015 31
