A View From the Driver's Seat: A Deep Dive into the Oil and Gas Market
By Jacob Wilson
At Maevlo, we love the range of experience and expertise that our investor partners bring from so many different arenas. Some of you are oil and gas experts, while for others, we're your sole contact point with the arena. We have shared our broad view on the energy markets over the past year or two, but thought it might be interesting for those of you who enjoy putting on the analytical cap to do a deeper dive into our take on the markets.
Where have we come from?
The last 5 years have been marked by volatility. Between COVID, the Russia/Ukraine war, and a reduction of U.S. exports due to a plant fire at the Freeport plant, gas prices have lurched back and forth between $1.49 and $8.81. While the Russia/Ukraine war is not causing prices to uptick in the way it did from June 2021 to January 2023, we believe gas prices will steadily grow over the coming years for three main reasons.
1.Where are things headed?
Before 2017, due to the difficulty of transporting it, we did not export or import very much natural gas, so the price remained insulated from the rest of the world. Europe would trade at $8/mcf while the U.S. would trade at $2/mcf. As our exports grow over the coming years we will become more normalized with the world. President Biden recently ordered a stop to the creation of natural gas export facilities, but a federal judge turned that over just a few weeks ago. Over the next 18 months, exports are expected to grow by 4 bcf/d due to 3 new sites coming online that will be exporting gas. By 2027, exports are estimated at 20 bcf/d, a drastic increase from today’s 12 bcf/d. The more we export, the greater the structural deficit we create for our own use, and the more we benefit from a normalization of international gas pricing.
2.Production seems to be on a natural decline
On the supply side, M. King Hubbert’s "Peak Theory" from 1964 still holds true. He predicted that once a play has produced 50% of its reserves, it will steadily decline from that period onward. This dynamic has since been observed for many oil and gas plays, including the Barnett and Fayetteville basins. We believe that the Permian, Marcellus, and Haynesville have reached that point. In these plays, well quality is declining with cumulative six-month production per lateral foot being down 5% since the beginning of 2021. The Haynesville, where Maevlo believes there is the most opportunity, has seemingly peaked. Production has gone down month-over-month since May of 2023 according to the EIA.
The EIA believes that this decline is due to the price of natural gas. They state that next year gas will be $3.1/mcf, and that will cause production to go up. Not diving into probable issues with getting permits and rigs online on a short timeline, we don’t believe that production companies will drill to meet demand when natural gas gets to $3/mcf. From June 2021 to Jan 2023, when gas prices were at their highest due to the Russia/Ukraine war, gas production went up 330 mmcf/d on average per month. While significant, this is only half of the growth of production the EIA states we need in the coming years, and remember, gas prices were at $8 during that rise of 330 mmcf/d. Further, they state prices will be 82% less than the average during the war. We don’t believe production companies will jump to drill at $3.1/mcf. This means we're looking at a serious deficit in gas production in the coming years.
3.American Use Rising
On top of all of this, American use of natural gas is still rising and there are signs it will go up drastically over the coming years. Natural gas energy is needed for data centers due to its ability to provide steady power with little of the harmonic distortion that is more common with wind or solar power. The use of AI, big data, and apps like ChatGPT is growing exponentially and so is the energy they need. A search using ChatGPT uses 10x the electricity a Google search uses. Training a ChatGPT bot uses the same energy as 5,000 homes in a year. AI continuing to grow in its use and needs over the next 5 years means hungry power plants that have to be powered. natural gas is the cheapest and cleanest source we can use to scale energy production to meet the needs we face.
So what?
We believe that natural gas production has peaked in the major plays of the US, while the growth of use and exports are only going up. Today, the Henry Hub price is $2.67. The EIA says next year the price will be $3.10. We think it will be higher. Even if we are half right, it will be a solid investment for years to come.
We're glad you're sitting with us in this place, acquiring and owning the hydrocarbons that are only going to get scarcer in a world that has great need of them.