Unleashing American LNG & The Implications To Electricity Pricing
Prior to Inauguration Day, President Trump had strongly signaled that his administration intended to support accelerated growth of the domestic liquified natural gas (LNG) export industry. Within hours of entering the White House, Trump began to make good on that promise. Amidst a flurry of activity, the incoming President issued an Executive Order entitled “Unleashing American Energy” that - among other things (Section 8) - specifically directs the Secretary of Energy to “restart reviews of applications for approvals of liquified natural gas export projects as expeditiously as possible, consistent with applicable law.” [1] It also calls for expedited environmental review of certain proposed deep-water LNG export projects.
Approvals of LNG export facilities had previously been subject to a temporary pause under the Biden Administration while the Department of Energy (DOE) reviewed related environmental and cost issues. That study - released on December 17 - highlighted risks to the local and global environment, as well as the potential for future costs increases associated with growing gas demand from significantly expanded LNG exports. However, the DOE study did not specifically call for a limit on exports. Now that the Trump Administration is here, it is abundantly clear that LNG exporters will see a far more favorable political climate. That development raises an obvious question: how might this new stance impact future gas (and power) prices?
Gazing into the crystal ball to make meaningful predictions is always an exercise fraught with uncertainty, as there are numerous variables to consider, as well as the ‘unknown unknowns’. [2] Despite this uncertainty, it’s worth examining the market drivers we are aware of to get a sense as to how the future might unfold.
What We Know: Some of the dynamics that could influence future prices
1.) The price of electricity typically tracks closely to that of natural gas. In vertically integrated markets where utilities still own the generation, those price impacts aren’t felt until later - in the form of eventual fuel adjustment charges. By contrast, in competitive wholesale markets those changes are often quite visible, since the generating assets dispatched on the margin are typically gas-fired units. These plants frequently set the market price. In some regions dominated by renewables - such as California - there are times when solar or wind affect prices. But for the most part, gas is still the king. The graph below from ISO-NE demonstrates just how closely these gas and power prices have correlated over the past 20 years. [3]
2.) With the advent of fracking, the U.S. natural gas patch has been extremely productive, producing record numbers year after year. 2023 production pegged out at a new high of 113.1 billion cubic feet per day (Bcf/d) and the first three quarters of 2024 look very similar. [4]
3.) The power sector uses a large chunk of that gas. In 2023, the U.S. consumed an average of 89.4 Bcf/d, with 40% of that total devoted to generating electricity. [5] Our nation was also the largest gas exporter on the planet, at 11.9 Bcf/d, [6] a number that keeps growing. As of December 2024, the U.S. had 14 Bcf/d of operating LNG export facilities. [7]
4.) Gas prices in 2023 and 2024 were among the lowest in the history of gas markets. For most of 2023, the commonly cited Henry Hub price ranged between $2 and $3 per MMBtu [8] with an average annual price of $2.53/MMBtu. [9] For the first three quarters of 2024, average monthly prices were even softer. While they hit $3.18/MMBtu in January, they then collapsed to a low of $1.49/MMBtu in March and struggled to tread water for much of the remainder of the year above the low $2.00 range. As can be seen in the visual below, December prices rebounded on weather concerns, and they have continued their climb in the face of widespread and severe January weather, but as recently as November, daily prices had slumped to record lows. [10]
5.) The U.S. is already the world’s largest LNG exporter, having taken that crown in 2023 and elbowing Australia and Qatar aside. In 2024, that number bumped up slightly, from a 2023 average of 11.9 Bcf/d [11] to just over 12.4 Bcf/d. [12] Now, however, the country is putting its foot on the accelerator with many new projects set to come online shortly.
An Enormous Expansion in LNG Export Capacity:
Will a growing volume of LNG exports significantly move the price needle? To help answer that question, let’s look at the actual numbers. Per the December 17 DOE study, in addition to the 14 Bcf/d in operation, another 12 Bcf/d of capacity is under construction. Beyond that sits an additional 22 Bcf/d of DOE-approved capacity that has not yet secured the necessary capital to break ground. [13] That 48 Bcf/d total represents over a three-fold increase from today’s export capacity, equal to about 45% of current domestic production. [14]
Pressure Release Valves on the Supply Side:
The DOE study projected that Henry Hub gas prices as modeled would increase from an assumed $3.53 MMBtu [15] to $4.62/MMBtu. It commented that this is roughly equal to an increase of about $.03 for each additional MMBtu of export capacity. [16] The study also noted that the Henry Hub prices in 2022 and 2023 were $6.45/MMBtu and $2.53/MMBtu, respectively, so this projected price increase resides well within recent historical ranges and is relatively modest. Why might that be the case?
To get a better handle on the gas pricing dynamic, it may be helpful to examine where our domestic gas comes from, and the economic drivers at play. The first element to understand is the concept of “associated gas,” methane that essentially “comes along for the ride” and is produced as a byproduct of oil drilling in shale hydrocarbon plays. This gas is not targeted, and where gathering pipelines do not exist, it’s disposed of by flaring. In many locations, though, it’s captured and piped.
As can be seen below, [17] there’s an awful lot of associated gas in the U.S., especially in the Permian Basin of Texas and New Mexico, and it’s growing. It represented 36.7% of 2023 U.S. natural gas production and it’s basically available at zero marginal cost. So, it will generally be produced irrespective of market prices.
Beyond that basically free supply, there are more price sensitive shale resources that make up the bulk of new supply and potential future growth. For example, gas supplies from the Marcellus and Utica shales (Pennsylvania and Ohio in the Appalachian Basin), and the Haynesville shale (northeastern Texas and northwestern Louisiana) are much more price responsive. When prices softened in the spring of 2024, some producers shut in their wells and reduced production, waiting to increase output when prices rebounded. [18]
In addition to that short term price cushion, there is a more powerful long-term shock-absorber that affects supply-demand balances and resulting prices, and that’s simply the number of drilling rigs deployed. When prices are low, rigs stop drilling. When prices increase, the rigs are quickly pressed back into service. The visuals below highlight both the flexibility and sensitivity of drilling rigs to prices. [19]
Of course, pipeline capacity will have to increase as well, but there are a number of large projects moving forward at present that will also help to address potential shortfalls in this area, including four pipelines from the Permian Basin that will add an additional 9.8 Bcf/d within the next few years, with even more future projects (literally) in the pipeline. [20]
One final point to consider as we look into the future is the ineluctable fact that drilling technology is constantly evolving and improving. Consider the fact that between 2007 and 2023, gas yield per rig soared nearly 100-fold in the Marcellus shales [21] as new technologies were brought to bear and drilling experience grew. A greater number of wells were drilled from a single platform, drilling bits improved, and drilling speeds accelerated, boreholes were longer and fracking pressures increased. All this combined to increase output.
The increasing application of artificial intelligence will further enhance such improvements. Perhaps, then, the critical remaining question becomes “How big is the economically exploitable gas reserve?” Here, too, the answer to that question will likely change. As technologies improve, the exploitable resource expands. That dynamic has been proving itself for many decades in the oil and gas patch, with fracking being perhaps the most dramatic concrete example. [22]
Where That Leaves Us:
Putting all the pieces together as we know them today, it is likely that the Trump Administration’s plan to unleash American LNG will apply pressure to future gas prices, to what extent is the question. Power prices are likely to remain highly correlated to gas prices, so it’s important to keep an eye on the fundamentals. On a seasonal basis, we can expect to see volatilities resulting from severe weather or geopolitical issues such as Ukraine conflict. However, in the longer term, the supply and demand equation will be driven by the same fundamentals that have recently governed the gas patch.
The supply side of the equation has proven to be highly adaptive and price-responsive in recent years. Infrastructure will need to keep pace, in the form of pipelines to support production increases. The short-term price response is to shut in or open existing wells, while the longer-term elasticity is created by the rapid change in number of active drilling rigs in the oil and gas patch.