US Gas Producers Seeking Greater Exposure to Fast-Changing Global Market

Persistent strength in global natural gas prices has upstream US executives pondering how to increase their exposure to international markets without disrupting the predictable returns investors expect.

Whether that exposure takes the form of equity investment, supply contracts or a combination of strategies remains to be seen. While multidecade deals may not be practical, "replacing Russian gas — and coal — is going to require US LNG for a long time" in the wake of Russia's invasion of Ukraine, Jim Krane, a fellow for energy studies at Rice University's Baker Institute, told Energy Intelligence. "US exporters that can certify a clean provenance upstream — less flaring and venting — will do better once the market gets competitive again.”

With European and Asian prices several times higher than domestic prices — even as those hit 14-year highs — US LNG exports have been maxed out at around 13 billion cubic feet per day, which potential suppliers see as far less than what's needed to capture rapidly growing markets in Europe and Asia.

Much more capacity is on the drawing board, but EQT Corp. CEO Toby Rice has called on the industry to grow exports to around 50 Bcf/d by 2030, which he argues would reduce global CO2 emissions by an incremental 1.1 billion tons per year and improve energy security for US allies.

EQT Pondering Equity Stakes

Core to EQT’s business is its roughly 18 trillion cubic feet of proved reserves in the landlocked Marcellus Shale, but the gas producer's corporate website landing page now prominently features a picture of an LNG tanker with the giant headline "Unleashing US LNG."

Rice said during the company’s first-quarter earnings call that EQT is "in discussions with LNG end-users across various geographies" and is "contemplating equity investment opportunities in LNG export facilities.”

Through its contracts with various pipelines, EQT has more than 1 billion cubic feet per day of firm transportation capacity to the US Gulf Coast, “which will underpin the initial leg of our LNG strategy,” Rice said. “Our ultimate prize … is to get exposure to international markets. We want to make sure we have the flexibility to enter into contracts that will give us exposure to better realized pricing. One of the ways that we get more flexibility towards accessing those contracts is to take an investment in the LNG facility itself."

Rice said key considerations will be the netback pricing for any contracts and potential returns on LNG investments, but he views long-term deals as necessary to underpin the infrastructure capital that support export growth.

“We’re not talking about a significant amount of growth for this industry to meet the [export] targets that we’ve laid out. It’s less than 10% growth a year [to] get to 50 Bcf/d as an industry,” he said. “And I think we can do that very sustainably, backed by long-term contracts to make sure we can preserve the type of returns that our shareholders are expecting and, quite frankly, deserve.”

Antero Weighs Risk, Reward

Some US producers believe they already have enough exposure to global markets without having to sign long-term deals with international buyers.

Although Antero Resources CEO Paul Rady agreed during the company’s first-quarter earnings call “that there will be a significant call on US shale gas in the coming decades,” his company is "not interested in longer-term supply deals unless we receive significantly higher premiums. There’s too much optionality today to get locked in prematurely.”

"Years ago, we were pitched deals, maybe through Cheniere, where there would be a sharing mechanism. We didn't bite on those, but we kept tracking those," Rady said. "And certainly, during the downturn, those would have been deeply underwater. So [I'm] glad we didn't even nibble."

Rady said given Antero’s 2.3 Bcf/d of firm transportation to LNG “fairways,” the company is “uniquely positioned to supply the increase in international demand. Today, we are already selling nearly 1 Bcf/d … to LNG facilities on a mix of long-term and short-term contracts. As additional LNG export capacity is built out, we think our premium to Nymex will increase and will become more closely linked to international prices.”

Chesapeake Eyeing Index Deals

Chesapeake Energy CEO Nick Dell'Osso said his company continues to hold discussions with counterparties in the LNG export market so it can gain exposure as infrastructure develops.

"We market greater than 4.5 Bcf of production every day, more than 2 Bcf of which is immediately adjacent to the LNG complex in the Gulf Coast and is already independently certified as responsibly sourced gas," he said this week. “At the end of the day, at these prices anything you do in the LNG world’s going to be a very long-term contract. So while there is a big delta between US gas prices and European or Asian gas prices today, over the tenor of that contract you’d expect there to be plenty of volatility in that spread: sometimes good, sometimes less good, sometimes maybe not so good. And so it’s really about a diversification strategy.

"If the deal is linked to Henry Hub, that’s not as attractive to us,” Chesapeake CFO Mohit Singh said. “What we are trying to diversify away into is some sort of an LNG index deal. So whether it’s TTF, the arguments or the discussions we are having internally is what’s the right amount. … From a diversification point of view, I would encourage you to think maybe 10%, 15%, 20% of our production, if we can link it to some sort of an LNG index price, whether it’s through some of these agreements or whether it’s a synthetic … deal, then that’s what we are driving toward.”

Coterra 'Wrangling' With Options

But lack of infrastructure could prove to be an obstacle to companies seeking more exposure to global pricing in the near term.

Coterra Vice President of Operations Blake Sirgo said the company moves 350 million cubic feet per day through Berkshire Hathaway’s Cove Point LNG facility located on the Chesapeake Bay in Maryland. He said growing those volumes in the near term could prove challenging as “most of the new capacity that’s coming on right away was spoken for years ago.”

“Supply is not an issue for us. The challenge is just economics. It’s expensive to get to the coast. There’s limited pipes to get there. So you pay a pretty good fee just to get there,” Sirgo explained.

“And once you get there, we’re entering a really crowded LNG market. And that’s really shown through in the deals that are being offered to the producers. So we’re wrangling all that right now, trying to understand it. But we’ve got to find a long-term deal that works for our shareholders and creates value, but also works for the buyer. And we haven’t found one yet, but we’re going to keep hammering away at it.”