The CF slide below shows very clearly the US competitive edge when it comes to making anything that has a natural gas base, and while we tend to talk mostly about ethylene, ammonia, urea, other ammonia derivatives, and methanol are all seeing significant cost advantages. The Chinese coal-based costs are better than those in Europe and Asia based on natural gas but margins remain well below those in the US. The challenge with the coal-based chemistry in China is that it has substantial CO2 emissions, and the facilities were not designed for carbon capture. As China develops a carbon cap and trade market and as these facilities get included, costs will rise significantly.
The theme of our Sunday report (to be found here) will be inflation this week and the signs that we are seeing across multiple industries which suggest it could be more problematic and worsen in 2022. One of the focuses is energy and how the pressures to be seen as good citizens is lowering investment in oil and natural gas production, while the world is not far enough advanced on energy transition to be able to substitute for the missing hydrocarbons. We would agree with many of the recent comments from some segments of congress, which is that the answer is not to curtail exports of LNG and crude, as by doing so we will starve the rest of the world of hydrocarbons and create worse shortages than Europe and China are seeing today. The better solution would be to support “clean” US production of the lowest emission fuels possible – especially for natural gas. As we have noted in prior research, with a global solutions hat on, the relatively low costs of natural gas F&D costs in the US, when combined with what we expect to be relatively low costs of emission abatement in the US, should drive more investment in the US, creating jobs and export income.
It is a gas, gas, gas! Every other story this week is about natural gas shortages and pricing – whether it is natural gas in the US or LNG everywhere else. The scatter diagram below from the EIA below is very interesting as it speaks of anticipation more than anything else. Gas prices are high given the level of US inventory relative to “normal”. There is speculation that demand is going to outstrip supply over the next few months. Whether much of this will be LNG-related remains to be seen as we may not be able to run the current capacity any faster – that said, through the end of July it looked like there was spare capacity at several of the US LNG facilities and maybe the constraint is shipping. Regardless, the current US price implies shortage, whether because domestic demand overwhelms supply this winter or because LNG steps up. The original timeline of the Venture Global facility at Calcasieu Pass in Louisiana has slipped and this facility will not impact demand for the next 12 months at least, with ExxonMobil’s Golden Pass project a year later and targeting a 2024 start.