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Tumbling US natural gas prices prove unstoppable, hurting producers

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Tumbling US natural gas prices prove unstoppable, hurting producers
© Reuters. FILE PHOTO: A view of BKV Corp?s commercial carbon capture and sequestration project, in Bridgeport, Texas, U.S., December 7, 2023. REUTERS/Arathy Somasekhar/File Photo

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By Arathy Somasekhar

BRIDGEPORT, Texas (Reuters) – For nearly a year, U.S. producers have slammed the brakes on production as prices fall. But relentless output gains including from oil companies that pump gas as an oil byproduct have unleashed record supplies.

In the oil versus gas contest, gas producers are losing out. Some are shutting in wells, canceling projects or selling themselves to rivals to avoid losses. Natural gas prices this month fell to an inflation-adjusted 30-year low of $1.59 per thousand cubic feet, benefiting consumers of the fuel like utilities, but hurting producers who are selling at nominal prices as low as they were in the depths of the COVID-19 downturn.

Nowhere is the pain of cheap gas as evident as Denver-based BKV Corp. In the last five years, it spent $2.7 billion to acquire 4,000 gas wells and two gas-fired power plants. It also pledged $250 million to build a dozen underground carbon capture and storage sites to make its gas more climate friendly.

The nosedive in U.S. gas prices has stalled BKV’s plans for an initial public offering and scuttled the carbon joint venture with Verde CO2 to couple its gas and power plants with carbon sequestration. BKV last year narrowly avoided loan defaults with a $150 million bailout by its parent.

Majority-owned by Thailand power giant Banpu Public Co., the little-known BKV in 2016 began buying scores of U.S. gas wells, taking castoffs from oil producers’ Exxon Mobil (NYSE:), Devon Energy (NYSE:) and others.

“We absolutely want to be the biggest natural gas producer in the country. That’s my ambition,” BKV Chief Executive Christopher Kalnin said in an interview here in December at its first carbon-sequestration site.

BKV’s profits soared to $410 million in 2022 on strong natural gas prices after Russia’s invasion of Ukraine spurred huge demand for exports of liquefied U.S. gas. The company launched a plan to build a U.S. version of its Thai parent, tying together natural gas and power. The plan included an IPO to help finance the gas-to-power expansion and a complement of carbon-burying wells.

CLIPPED WINGS

But BKV fell back to earth under prices suffering from a relentless expansion of U.S. natural gas output. Its profit fell to about $79 million in its most-recently reported nine-month period.

U.S. gas firms last year cut drilling 22% to stem the gusher. But the flows keep coming: The U.S. will pump 105 billion cubic feet a day of gas this year, up 2.5 billion cubic feet a day in the last year. That increase is enough to fuel 12.5 million U.S. homes for a day.

In most industries, volume increases are good. More production equals more profit. But rising output has overwhelmed efforts to curtail drilling and even demand from frigid temperatures, leading to a price drop that knocked U.S. gas recently to less than a third of 2022’s average $6.50 per million British thermal units. By contrast, benchmark WTI crude prices fell just 17%.

Oil prices have held steadier thanks to global supply cuts by major OPEC producers and their allies.

But soaring gas production, especially from oil companies who view gas as a byproduct of their output, has proven “relatively insensitive to prices,” said Nicholas O’Grady, CEO of U.S. shale gas explorer Northern Oil and Gas.

Gas producers have been reluctant to cut output deeply on the prospects of giant new liquefied natural gas (LNG) plants opening this decade, he said.

LNG exports would drain the excess gas supplies and should return prices to levels that make gas profitable to drill again by 2025, O’Grady and BKV’s Kalnin predict.

There are four U.S. projects with export permits on the drawing boards that would consume up to 6.3 billion cubic feet of gas that if they go ahead would be producing LNG later this decade.

The danger is that third wave of new LNG plants may be delayed or lost forever. President Joe Biden’s administration last month indefinitely paused reviews of new gas-export permits, jeopardizing as much as 32 billion cubic feet per day of future consumption.

U.S. natural gas producer Comstock Resources (NYSE:) said last week it would reduce the number of rigs in operation and suspend its dividend until gas prices rise sufficiently, while rival Antero Resources (NYSE:) said it would cut drilling and drop project spending budget by 26%.

‘PERFECT STORM’

BKV, short for Banpu Kalnin Ventures, began operations in Pennsylvania in 2016 with a plan to buy additional old gas fields from big oil companies, invest only enough to hold production steady, wait for prices to rise and – only then – invest in expanding production.

The moment appeared to arrive in mid-2022. As U.S. gas climbed to over $9 per thousand cubic feet, BKV’s Kalnin launched a costly and ambitious expansion plan.

In July that year, he closed on a $750 million deal for Exxon Mobil gas properties in North Texas. The same month, he acquired a Temple, Texas, gas-fired power plant for $460 million. Weeks later, he followed that deal with a $250 million partnership with Texas-based Verde CO2 LLC to build a dozen carbon sequestration sites across the United States.

“We didn’t see prices collapsing like they did,” said Kalnin at the opening of his first carbon sequestration site in December.

Kalnin, a former McKinsey consultant who spent his early years in Thailand and later worked for the country’s national oil and gas company, hasn’t given up on his gas-to-power empire.

“(Gas prices) are setting up for another fly-up in the second half of 2024,” Kalnin said in December, pointing to forecasts for rising LNG demand.

“There are micro windows for IPOs opening up,” a spokesperson added on Tuesday. “We are hoping to stay ready for when that micro window opens. Market performances for IPOs and gas prices need to improve,” she added.

Associated gas, which comes out of wells alongside oil, yanked the rug out from Kalnin’s vision. More than a third of all U.S. gas production comes from producers drilling for oil, according to government estimates. That figure is rising as wells mature and more gas comes up than oil.

BKV last year won a lifeline from its parent, selling shares to Banpu for $150 million to avoid breaching debt covenants. Most of the cash was put into a debt service account.

“You have this perfect storm. A warm winter plus too much gas supply, both primary and associated, and now, possible delays to new LNG export permits,” said Blake London, a managing partner of private equity fund Formentera Partners.

Commodities

Gold prices slide as M.East fears ease, rate jitters persist

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Investing.com– Gold prices fell in Asian trade on Monday as waning concerns over a bigger war in the Middle East sapped safe haven demand for the yellow metal, while bets on higher-for-longer U.S. interest rates also pressured prices. 

fell 0.9% to $2,370.45 an ounce, while expiring in June fell 1.2% to $2,384.05 an ounce by 00:48 ET (04:48 GMT). 

Gold demand eases as Iran-Israel fears wane 

The yellow metal had strengthened sharply over the past two weeks, hitting record highs above $2,400 an ounce as Iran and Israel carried out strikes against each other.

But Iran was seen downplaying the impact of an Israeli strike on Friday, while also outlining no immediate plans for retaliation. This spurred some hopes that a conflict between the two countries will not intensify, denting some safe haven demand for gold.

But reports on Monday showed that forces in Iraq had carried out some strikes against a U.S. military base in Syria, while Israel was seen continuing its offensive against Gaza. 

This kept some tensions over the Middle East in play, especially as Israel and Hamas failed to reach a ceasefire agreement. 

US rate fears remain in play 

The steadied near five-month highs, while U.S. Treasury yields advanced as traders remained on edge over higher-for-longer interest rates.

Strong inflation readings for March and hawkish signals from Federal Reserve officials saw traders largely price out expectations for a June rate cut by the Fed. 

The prospect of higher-for-longer interest rates pressured gold prices, given that such a scenario increases the opportunity cost of investing in bullion.

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Gold had also recently surged into overbought territory, which, with the prospect of sticky rates, made the yellow metal vulnerable to profit-taking.

Other precious metals fell on Monday. fell slightly to $943.80 an ounce, while slid 2.8% to $28.038 an ounce.

Copper, aluminum prices at 2-year highs on tight supply bets 

Among industrial metals, copper and aluminum prices rose slightly on Monday, notching new peaks for 2024 as the prospect of tighter supplies- following stricter sanctions on Russian metal exports- kept prices high. 

on the London Metal Exchange rose 0.3% to $9,919.50 a ton, while rose 0.4% to $4.5105 a pound. Both contracts were at around two-year highs. 

rose 0.2% to $2,671.0 a ton, and were at their highest level since June 2022.

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Commodities

Oil prices fall as Iran-Israel fears cool, economic jitters persist

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Investing.com– Oil prices fell Monday, extending losses from the prior week amid growing hopes that the Iran-Israel conflict will not escalate further, limiting the potential disruption of supplies from the key oil-rich region. 

At 08:20 ET (12:20 GMT), fell 1% to $86.41 a barrel, while dropped 1% to $81.40.

Both contracts fell more than 3% each last week as fears of a demand slowdown, amid weak global economic conditions, somewhat offset escalating tensions in the Middle East. 

Iran-Israel escalation bets dwindle after Friday strike 

Bets that a conflict between Iran and Israel will grow have somewhat dwindled in recent sessions, even as Israel was linked to missile strikes against Iran on Friday.

Iran largely downplayed the impact of the Israeli strikes, and flagged no immediate plans for retaliation. 

This lack of immediate retaliation was a key driver of bets that the conflict will not worsen. While oil prices had surged to nearly $91 a barrel in the immediate aftermath of the Israeli strikes, they swiftly curbed most of their gains later in Friday’s session. 

“The market is obviously of the view that spare OPEC production capacity will come into play in the event of any supply shocks, or that ongoing tension is unlikely to lead to significant supply losses,” said analysts at ING, in a note..

But continued tensions in the Middle East, especially as a Israel-Hamas truce appeared unlikely, still kept some concerns over supply disruptions in play. 

Media reports on Monday indicated that rockets were fired at a U.S.-led coalition base in Syria, while Israeli strikes in Gaza continued. 

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Middle East tensions have been the biggest driver of oil price gains in recent months. 

Rate fears, demand concerns weigh on oil prices

Oil prices also faced pressure from a recent surge in the dollar, as traders swiftly scaled back bets on early interest rate cuts by the Federal Reserve. This notion was furthered chiefly by stronger-than-expected U.S. inflation readings for March.

Markets also feared that higher-for-longer U.S. interest rates and sticky inflation will damped economic growth this year, in turn chipping away at global oil demand.

Recent data showing a bigger-than-expected build in U.S. furthered these concerns, while also raising questions over just how tight oil markets will be in the coming months. 

U.S. oil production has remained at record highs in recent months, somewhat offsetting expectations of tighter supplies on production cuts from other producers, specifically the Organization of Petroleum Exporting Countries.

The latest data from shows that U.S. drillers increased their oil rig count by five over the course of last week to 511.

“This is the highest number of active oil rigs since September last year when we saw WTI trading above $90/bbl several times,” added ING.

(Amber Warrick contributed to this article.)

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Commodities

As shale oil gains slow, deepwater port struggles for customers

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By Arathy Somasekhar

HOUSTON (Reuters) – As U.S. shale oil boomed last decade, an oil pipeline company pitched an ambitious multi-billion-dollar export port off the Texas coast to ship domestic crude to buyers in Europe and Asia.

In April, Enterprise Products Partners (NYSE:)’ SPOT became the first project to receive a license from the U.S. maritime regulator for a deepwater port that could load two supertankers, each of which can carry up to 2 million barrels of oil at a time.

But multi-year regulatory delays, a loss of commercial backers and slowing U.S. shale production has left SPOT, or Sea Port Oil Terminal, and its three rival projects without any secured customers, energy industry executives say.

“There are a lot of gray areas right now with export projects,” said Zack Van Everen, an oil analyst at energy investment banker Tudor Pickering Holt & Co.

Enterprise declined to make an executive available for an interview, but said it continues to develop the project.

Shale producers and traders rely on ports to get their oil to market and are balking at the higher-than-expected loading fees for new projects even if they are able to fully load supertankers, executives said.

HIGHER COSTS

SPOT, proposed for a point 30 miles off the Gulf coast in 2019, is the only Texas deepwater project with its government approvals. But its cost has soared to about $3 billion, two industry experts said, from an original estimate of $1.85 billion for Enterprise.

It has no long-term customer contracts, or joint venture partners, stalling a financial green light from the company, sources said. The project, if approved, is currently expected to start up in 2027.

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A customer willing to commit the largest volume is being offered a $1 per barrel rate by Enterprise to load at SPOT oil transferred from its Houston storage terminal, three people familiar the terms said. Clients with smaller loads have been offered an about $1.20 a barrel fee.

That compares with the all-in cost of about 75 cents per barrel to load in Corpus Christi, Texas, the top U.S. oil export port, a source familiar with export operations said.

To sweeten the deal, Enterprise is offering preferential terms for loading schedules, and may bundle some of its other services to make the price more competitive, two of the people said.

Enterprise disputed the fees, but declined to provide the project’s cost and the per barrel terms.

A deepwater port allows customers to load oil directly onto a supertanker, eliminating the additional cost of loading the oil on smaller ships at shallower ports and then transferring the crude from the smaller vessels to larger ones.

But it has lost Chevron (NYSE:) as an early backer because of the regulatory delays to secure a license, and Canadian oil pipeline operator Enbridge (NYSE:) has released its option to take a stake in SPOT, Enterprise said.

Chevron declined to comment on commercial matters.

An Enbridge spokesperson said it views SPOT “as a valuable option for our Canadian heavy crude customers to be able to access the project,” but declined further comment.

LESS NEED FOR DEEPWATER PORTS

U.S. exports of crude rose to a peak of 5.6 million bpd in February 2023, and existing facilities can handle as much as another 1.5 million barrels, though port congestion could limit that number, according to RBN Energy. Russia’s invasion of Ukraine also has shifted global flows with more U.S. vessels going to Europe instead of Asia, which were primarily geared to using supertankers.

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“The short-term dynamic is less need for big ship capacity, which actually fits the current U.S. export capacity a lot better,” Colin Parfitt, Chevron’s vice president of midstream, said in an interview in March.

Changing flows and slowing shale output gains have created uncertainty for shippers. “That’s changed the dynamic a little about how people want these (deepwater ports),” Parfitt said. “If you get one built, it is going to crowd out the others.”

Currently, there is one U.S. offshore port – called the Louisiana Offshore Oil Port – that can fully load supertankers. However it primarily handles oil produced in the Gulf of Mexico and has few pipes that link to the top U.S. shale field, the Permian, in West Texas.

SPOT’s largest target would be moving shale oil, and those output gains have slowed dramatically. U.S production is expected to rise 280,000 barrels per day to 13.21 million bpd this year, according to the U.S. Energy Information Administration. That compared with a one-year gain of 1.6 million bpd in 2018.

Enterprise said this month that it projects growth in and around the Permian basin past 2030.

Consolidation among top shale players, like Exxon Mobil (NYSE:)’s recent purchase of Pioneer Natural Resources (NYSE:), also took away customers for Enterprise and other players, with some of the largest shale drillers already holding long-term contracts with existing export facilities.

Of the three other deepwater port projects along the Texas coast, private-equity backed Sentinel Midstream, oil refiner Phillips 66 (NYSE:) and pipeline operator Energy Transfer (NYSE:) each have sought U.S. approvals for offshore ports. So far, none have received licenses.

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“Between the current dock capacity along the U.S. Gulf Coast, and the most aggressive production projections, it appears that one, at most two,” could proceed, said oil export consultant Brett Hunter of Energy Hunter LLC.

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