The nat-gas conversation is shifting: These three reports show why
Permian non-associated gas, the latest case for Constitution, and how LNG and power growth could upset the apple cart
The last few weeks have brought a small wave of publicly released gas-market reports—some from generalist shops,1 others from energy experts. But they all circle the same set of big structural questions in North American gas: How the Permian will evolve, which Northeast pipeline expansions make most sense, and what rising LNG and power loads mean for Henry Hub.
In today’s post, I walk through three of the most interesting pieces — not to “fact-check” them, but to highlight what I admire about them, where I disagree, and where they raise deeper analytical questions that I’m investigating now and will address in more detail soon.
A16Z: Gas-fired intelligence (part 1 and part 2)
What makes this piece notable is its audience: A16Z is introducing Silicon Valley to gas-market fundamentals, and Michael Spyker does an admirable job explaining the value chain while also offering original, forward-looking insights.
Central thesis: The combination of LNG demand under development and accelerating growth in gas-fired generation will send Henry Hub prices sharply upward, and both consumers and policymakers need to make major changes now to avoid calamity later
Money quote:
The sooner we can commit to a more-firm gas consumption trajectory (i.e. the sooner Silicon Valley can care about gas for the first time!) the sooner the upstream industry can prepare a supply response, the LNG industry can adjust their infrastructure plans; and the better off the world is.
Spyker also posits several other counter-consensus ideas that I think are correct:
Consumers should agree to fixed-price contracts so that producers have a reliable price signal to invest and deliver the needed higher-cost gas volumes
The US should stop permitting more LNG exports, because eventual higher gas prices will strand gas infrastructure investments in less-developed countries and therefore bring geopolitical challenges
Long-haul gas transmission development from Canada will pay off
Relying on associated gas growth is dangerous, given divergent oil and gas fundamentals
Where I differ: My main point of disagreement is that Permian gas isn’t neatly “associated” or “non-associated.” Rather, it sits on a spectrum, with varying responsiveness to oil, NGL, and gas prices. A 6–8 Bcf well that also delivers ~200,000 barrels of oil — of which thousands could be drilled in deeper Permian intervals — is meaningfully more attractive than a dry-gas 6–8 Bcf well in the Rockies. The Permian isn’t a top-tier gas basin, but it’s not the Fayetteville either. Even at $60/bbl WTI, $3+ Waha prices will incentivize additional gas volumes. Treating it as purely “associated” misstates the shape of the gas supply curve.
Draft posts coming: Why the AECO outlook is much more bearish; The needle producers need to thread to avoid prices getting too high
That supply-curve nuance matters a lot when you zoom in on the Permian basin, which several major consumers are counting on for gas production growth.
East Daley: the Permian Basin at a crossroads (part 1 and part 2)
Central thesis: The forthcoming buildout in Permian gas takeaway — driven by a different set of players than has been the case historically — is so large as to reshape not just gas markets but also upstream capital allocation decisions
Money quote:
Higher in-basin prices would make gas-focused development more attractive in the Permian, enabling producers to diversify their drilling footprints and capture profits from crude oil as well as natural gas.
What East Daley gets exactly right is that different shippers are driving this wave of Permian gas takeaway than the last one. Midstream firms and gas-market analysts already see how a structurally tighter gas market, combined with weaker oil prices, could reshape upstream capital allocation. But upstream and oil-focused teams haven’t yet fully internalized this.
Where I differ: East Daley suggests that new Permian gas pipelines could create basin-on-basin competition by unleashing new supply. I think the more likely scenario is the reverse: Permian non-associated gas emerges precisely because other basins aren’t positioned to deliver the needed volumes.
Draft post coming: All these Permian pipelines are not going to fill with associated gas
While new Permian pipelines face questions around the sources of gas supply growth, in the Northeast, the economics of potential new pipelines depend on volatile seasonal demand.
S&P: Constitution Pipeline market impact report2
Central thesis: If built, Constitution Pipeline would save Northeast consumers money in cold winters and facilitate emissions reductions
Money quote:
Avoiding a single extreme price event in addition to average weather savings offsets 15 years of end-user costs
Where I differ: S&P’s analytics are gold-standard for a project like this: jointly using a power-dispatch model and a gas-flow model. But while the individual slides are compelling, the report doesn’t shift my view that Constitution no longer makes economic sense. Their own numbers show why:
Under normal weather, shippers’ demand charges would be ~$400 million in the red
In peak months, only 100-250 MMcfd of capacity is available into constrained markets on Iroquois (and presumably none on TGP)
The report convincingly argues that Constitution would save consumers money compared to the status quo in cold winters. But it does not address whether other options, such as ramping up LNG imports, would save consumers more money. I am skeptical that a pipeline — a 365-day fixed-cost solution — is the most economic option for meeting what is, even in cold winters, a ~60-day problem.3
Draft post coming: We need to stop talking about Constitution
Taken together, these reports show how quickly the gas narrative is shifting — and how unevenly different sectors are updating their priors. The next few quarters will bring clearer signals on Permian gas, Northeast pipeline development, and how LNG and power growth will reshape Henry Hub prices. I’ll be digging into each in upcoming posts.
The original genesis of this post was a client sending me one of the generalist reports and requesting a FireJoeMorgan-style analysis of it, LOL. But that premise gave me the idea of writing something that engages with other expert research in a collegial way.
Full disclosure: the first three authors of this report were colleagues of mine when I worked at Wood Mackenzie from 2008-17
Bigger picture, this is why pipelines work better for LNG developers and data centers, but are tricky for typical power plants, and an extremely expensive solution to mitigate price spikes