It is a year since the outbreak of the war on gas stoves, when a federal official’s musings about potentially banning them to improve indoor air quality sparked one of the more absurd conflicts that daily addle US politics. Gas bulls have less to fear from shadowy stove agents; more from an unlikely pairing of Middle Eastern politicos and militants with American cleantech developers.

US gas has enjoyed an extraordinarily successful two decades. Production has more than doubled. Consumption has risen by almost half, with gas definitively displacing coal as the No. 1 fuel for generating electricity.

The Gas Explosion

Supply rising twice as fast as demand doesn’t help prices, though. Apart from the Ukraine war-inspired spike of 2022, benchmark gas futures have traded in low single-digits for many years.

The Other Side of the Shale Boom

Warm weather hasn’t helped of late. The real challenge, however, concerns shale and the seemingly unstoppable growth of renewable power generation.

Some 62% of US gas output in 2023 was so-called associated gas, a by-product from oil wells, according to Rystad Energy, an analysis firm. Moreover, oil-producing basins, led by the Permian, accounted for 72% of the growth in gas production. That explains this seemingly odd chart.

Where’s the Gas Coming From?

US crude oil production hit a record last summer, thanks in no small part to Saudi Arabia’s persistent efforts, along with OPEC+, to support prices by withholding production. The flare-up in Middle Eastern tensions since October has offered additional support. Rystad expects US associated gas production to keep rising through 2027.

On the demand side, power plants are the only appreciable source of growth.

The Power Center

The basic story here is that shale devoured coal’s lunch. Annual coal-fired power generation fell by 75 terawatt-hours, or half, over the past decade and gas-fired generation increased by virtually the same amount. In a recent analysis of the period 2016-2023, Alliance Bernstein calculated the power sector’s demand for gas increased by an average of 1.15 billion cubic feet per day, annually, with the biggest contributors being replacement of shuttered coal-fired plants and taking market share from those that remain.

Beating Coal, But …

Factors behind annual average growth in US gas consumption by power plants, 2016-23, billion cubic feet per day

Notice, however, that nearly all the gain from coal retirements was offset by the explosion in renewable power, chiefly wind and solar. Therein lies a structural, and growing, headwind for gas in its last remaining source of domestic demand growth.

With virtually zero running costs, renewables outcompete other generators when the sun shines and the wind blows. Gas-fired plants play a critical role when those conditions aren’t met, ramping up quickly at sunset, for example (an important dynamic in the two biggest domestic power markets, Texas and California). Nonetheless, as renewables expand, the hours of the day when other plants, including gas, can operate shrink.

Bernstein estimates that if renewables installation accelerates to 30 gigawatts a year — up from 18 gigawatts per year since 2015 — gas-burn by power plants would decline slightly through the rest of the decade. Goodbye growth.

This chimes with an analysis of electrification trends by Hugh Wynne at SSR LLC (I wrote about that here). It may also understate the near-term risk arising from the Inflation Reduction Act.

The IRA’s manufacturing subsidies have already spurred plans for more than 120 gigawatts of new domestic solar-module manufacturing capacity. That portends even cheaper solar power since developers of renewable projects can also take advantage of extraordinarily generous IRA production credits. Assume solar and wind deployment accelerates instead to 70 gigawatts per year, and gas demand from power plants would actually drop by about 10 billion cubic feet per day, or 29%, according to calculations by Andy DeVries, who leads utilities coverage at CreditSights, a fixed-income analytics firm.

That assumes, by the way, some help for gas in the form of rising power demand from electric vehicles and continuing coal retirements. Even here, there are non-obvious risks. More than a third of the US coal-fired fleet closed over the past decade and those were the least competitive plants. From here, it gets incrementally harder for gas to displace the remainder, absent a thus-far elusive carbon tax. For example, so-called “mine-mouth” power plants — built next to coal supply, avoiding considerable freight costs — can generate power at a price “in the low $20s” per megawatt hour, says DeVries. That’s competitive with even efficient gas-fired plants at current gas prices1 — which, at the least, would tend to curb price rallies.

Play around with assumptions but the message is pretty clear. Even if gas demand for power generation doesn’t drop precipitously, its days of being the growth engine for domestic demand look close to being numbered. That’s before we even consider the impact of more batteries — the single biggest recipient of planned US cleantech investment — on the grid eating into gas-fired plants’ role of backing up renewables.

So where does gas go for growth? Overseas.

The US just became the No. 1 exporter of liquefied natural gas, or LNG; a remarkable turnaround from two decades ago when imports were expected to balloon. Indeed, looking back, exports soaked up more surging shale production even than the power sector.

Gas Vent

For a world that still needs to quit its coal habit, and a Europe that needs to quit its Russia habit, swelling US cargoes of LNG are a timely boon. Patriotic bulls should temper their expectations, however. Outside of acute emergencies like the invasion of Ukraine, foreign buyers are also price conscious when it comes to gas. They also know more than a thing or two about deploying renewables themselves.