Risks for New Natural Gas Developments in Appalachia March 2021 Peter Erickson Ploy Achakulwisut Stockholm Environment Institute U.S. Ohio River Valley Institute 1 Risks for New Natural Gas Developments in Appalachia Peter Erickson and Ploy Achakulwisut Stockholm Environment Institute U.S. March 2021 KEY FINDINGS • The gas industry in the Appalachian region of Pennsylvania, Ohio, and West Virginia is vulnerable to sustained, low prices of domestic gas and natural gas liquids (NGL). • Recent prices are not high enough to support widespread investments in gas and NGL infrastructure — including new gas fields, pipelines, and export terminals. • Governments around the world, including the United States, have committed to deep decarbonization under the Paris Agreement. This suggests profound changes to oil and gas markets that would render new Appalachian gas fields unprofitable, on average. INTRODUCTION Then, starting just over a decade ago, Pennsylvania, Ohio, and West Virginia The modern U.S. oil industry began in witnessed a revival of its petroleum industry. Appalachia in 1860, with a frenzied boom in Improved extraction techniques — particularly northwest Pennsylvania (Yergin 2009) and, a horizontal drilling and hydraulic fracturing, decade later, the Ohio founding of Standard or “fracking”, which uses pressure to split the Oil, which later spawned both ExxonMobil and hydrocarbon-bearing underground formations Chevron. But by the turn of the 20th century, — unlocked previously inaccessible reserves, Appalachia’s status as a major oil producer boosting Appalachia’s production of natural gas had crested. As the region’s oil production and associated liquids to all-time highs. dwindled, the industry shifted its attention to new discoveries in Texas and other western There are now signs that Appalachia’s gas states. boom may soon run out of steam. Key global Ohio River Valley Institute 2 energy markets, including the United States, economic viability of the gas industry in are quickly shifting to inexpensive renewables Pennsylvania, Ohio, and West Virginia as and other forms of low-carbon energy (IEA they recover from the pandemic. It finds that 2020b). The global pandemic seems to have northern Appalachia should rethink its reliance accelerated these trends: fossil fuel demand, on the gas industry, and instead foster a more prices, and investment have all declined during resilient economy insulated from the booms the pandemic, even as renewable investments and busts of fossil fuels. have continued their ascent (IEA 2020b). OVERVIEW OF GAS — RELATED The risks of a ‘bust’ in natural gas follows TRENDS closely on the heels of the ongoing collapse of Appalachia’s coal industry. These disruptions to coal were caused in part by the fracking boom, Over the past decade, fracking has driven which encouraged electric utilities to shift from natural gas (hereafter, just gas) production in coal to inexpensive gas. Now there are signs Pennsylvania, Ohio, and West Virginia to all- that gas itself could get passed up for lower- time highs (Figure 1). carbon and lower-cost renewables, introducing new risks for communities that rely on gas The rapid increase in gas production — not just extraction for employment and tax revenue. in Appalachia, but also in other parts of the This paper explores trends affecting the country where gas was often extracted as a 12 10 8 Gas production, trillion cubic feet 6 (TFC) 4 Pennsylvania 2 Ohio - 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Figure 1. Gas production since 2000 in Ohio, Pennsylvania, and West Virginia. Source: U.S. EIA (Source: U.S. Energy Information Administration 2020d) Ohio River Valley Institute 3 by-product of more-profitable oil extraction (e.g. outlook associated with the coronavirus, and in west Texas) — has caused prices to collapse. the result is a cloudy outlook for gas producers Gas prices in the mid-2000s, immediately and the communities in which they are based. before the fracking boom began, typically stood at $8 per million btu (Mbtu) or higher, If the prospects of growth in gas extraction in as measured at the Henry Hub pricing point Appalachia are to be revived, gas prices would (U.S. EIA 2020). At the beginning of 2020, need to rebound and increase. Investors would just before the coronavirus pandemic began, need to see price forecasts that allow them to gas prices were hovering around $2 per Mbtu. cover the costs of drilling new gas wells and This drop stemmed from basic economics: meet profit targets. However, any increase supply increased faster than demand, forcing in prices will require an improvement in producers to compete aggressively, putting underlying market conditions. The question we downward pressure on prices. look at in this paper, therefore, is: what are the major drivers of gas demand that will influence Gas itself is mostly methane (CH4), and is future price outlooks for gas? the chief product sold to utilities, homes, and businesses. Other hydrocarbons extracted As the economy moves past the coronavirus, from gas wells, including ethane (C2H6), future long-term demand for gas (and related propane (C3H8), and higher-carbon butanes NGLs) will be determined not just by the pace and pentanes, are pressurized, condensed, of economic recovery, but also by trends in and transported to end markets as natural gas technology (e.g. renewables, which compete liquids (NGLs). Prices for ethane — the NGL with gas) and competition from other gas (and produced in greatest quantity (U.S. Department petrochemical) producers in other parts of the of Energy 2020) — have, like for gas, dropped country and the world. sharply since the mid-2000s (U.S. EIA 2020). Government policies will also play a The drop in prices for gas has helped it role, including those that the U.S. federal compete with other fuels, especially coal, and government, U.S. states, and trading partners has led to an increase in gas consumption (especially in Europe) put in place to follow for electricity generation. But the low prices through on their announced intentions to have also raised questions about the viability dramatically reduce greenhouse gas emissions of continued expansion in gas extraction. (such as in the Paris Agreement). Policies to Bankruptcies in the industry are increasingly improve local air and water pollution from common (Williams-Derry et al. 2020), and natural gas — such as limits where new gas wells supermajors ExxonMobil, Shell, and Chevron can be drilled — could also affect gas demand have all steeply written down or sold assets and supply (Iaconangelo 2020). (Hipple et al. 2020). The Atlantic Coast Pipeline from West Virginia to North Carolina In the next section, we describe the largest four has been cancelled. Without it, producers factors we see affecting gas development. We may have to compete more aggressively for then synthesize our findings into an assessment existing pipeline capacity in the future (Barth of the financial outlooks for Appalachian gas et al. 2020). Add the uncertainty in economic production. Ohio River Valley Institute 4 MAJOR FACTORS AFFECTING Most of the low-carbon studies we reviewed DEMAND FOR APPALACHIAN find U.S. gas consumption declining to less than 20 TCF by 2040 (Feijoo et al. 2020; GAS Haley et al. 2019; IEA 2020b; Larson et al. 2020; The White House 2016) (Figure 2). Four factors will set the course for Appalachian Reducing gas consumption to this level would gas demand in the years ahead. Since most gas be a reduction of more than 14 TCF compared produced in Appalachia has been (and will to the currently foreseen reference case by the continue to be in the near future) consumed in U.S. Department of Energy, and about 11 TCF the United States, the most important factor is below recent (e.g., 2019) levels. how domestic U.S. gas demand might evolve. As shown in Figure 2, these studies collectively The other three factors relate to international show that a U.S. energy transition consistent demand for gas and NGLs and, therefore, the with holding warming to globally agreed levels prospects for export markets; the pace of global would mean substantial reductions in U.S. gas decarbonization; the availability of facilities demand over the next two decades. The studies that can export LNG abroad; and the strength differ primarily in how quickly they foresee of the petrochemical market. policy action, and the degree to which they take into account the recent sharp increase in Future of U.S. gas demand gas consumption in 2018 (Figure 1). Studies that show an earlier (in some cases, no longer U.S. gas consumption has risen steadily plausible) reduction in gas demand, beginning for years, and has helped displace coal for before 2020, show more modest rates of year- electricity generation (Houser et al. 2017). on-year decline, whereas more recent studies However, that increase may not continue. that begin action instead in the next few years, The U.S. Department of Energy foresees gas show that decline rates would need to be even consumption staying flat over the next decade, steeper. at about 31 trillion cubic feet (TCF) annually (U.S. EIA 2021), as shown in the gray line in The reduction in U.S. gas demand as the Figure 2. economy decarbonizes could also have consequences for NGLs. The economics of Furthermore, as the cost of renewable energy wells that produce NGLs depend heavily on continues to drop (Henze 2020), and policy the price of gas, since most wells produce momentum builds for serious efforts to considerably more gas than NGLs (Rystad address climate change (including by the new Energy 2020). If new gas fields and wells presidential administration), U.S. gas demand cannot go forward because of insufficient could decline, perhaps steeply. demand for gas, then fewer NGLs would be extracted as by-products, in which case NGLs Several studies have quantified the prospective may not be available in sufficient quantities to declines in demand for U.S.