KAOS Reigns Already!

“The truth will set you free, but first it will piss you off”.

I know how Cassandra feels.   I found myself drawn into my first binge watch of the year when the “Kaos” series came to Netflix this month.    If you like Jeff Goldblum it’s a good watch.   If you like Jeff Goldblum and Greek mythology it’s a home run.    A show about prophecies is definitely on trend – and as a long term forecaster in the oil, gas, and gas liquids markets, it suddenly hit me that I have a lot in common with Cassandra.

It all fits – she basically gives away 2 of the most important plot points early on, and if you aren’t looking for her, you’ll blow right by her scenes.     And you’ll be several episodes in before you realize she told you so, and told you in time for at least some of the characters to do something differently.     Hair and makeup, check – she looks like she forgot her hairbrush during a business trip and had to improvise 30 minutes before a presentation too.

The overall theme even fits – the big prophecy that Zeus is trying to deal with is: "A line appears, the order wanes, the Family falls, and Kaos reigns."      His problems began with a wrinkle, mine with a line on a chart.    Over a year and a half ago, at an industry conference for people who buy and sell petrochemical feedstock and propane, I forecast that by mid to late 2024, we’d be seeing US shale oil production plateau.    After that, the next molecule to drop would be that US gas supply/demand balances would tighten, prices would rise, and the market would become more volatile once the current batch of LNG terminals under construction started up in 2025-2026.   

In retrospect I should have been less concerned about pushback than about silence.    No one in the audience had a rebuttal, a counter argument, or even some other prediction to put to the group.  

Same response 6 months later when I expanded on the “supply winter is coming” theme.   I reminded that forecasters assured us back in 1999 that the “abundant, cheap” natural gas market conditions we’d enjoyed for nearly 15 years at that point would continue.

The consensus then was not only would gas continue to be cheap, there would be enough future supply to reinvest in modern, efficient gas turbines to expand our natural gas power gen fleet  to provide low cost peaking power for growing, newly deregulated power markets in California, then as now a trend-setter.   

The story of Enron, whose foray into the gas and power markets and subsequent corporate collapse followed these predictions by a couple of years, is legend – real world legend, not a myth.    That time period, in retrospect, marked the end of the so-called conventional natural gas supply “bubble” that began to inflate in 1986 when oil prices collapsed, oil drilling slowed, and natural gas production continued strong, in part supported by high-priced long term contracts signed by utilities who were concerned about supply for the NE US heating markets.

The omens are appearing again – instead of a glitch in the fountain on Mount Olympus, we’ve got another big report from the National Petroleum Council telling us a familiar story.   As in 1999, the consensus of the organization’s prominent oil and gas producers and big consulting groups is that natural gas production, at least, will continue to grow and support the demand for lower carbon, cleaner burning power plant fuel and competitive petrochemical feedstocks.

This time, it’s not just the US market that will benefit from the shale industry’s success.  We’ll also supposedly have enough surplus gas to double our exports to world markets in just 3 years, to grow past that in 5, and to support a buildout of backup power supply for the AI data center boom and renewable energy.     

Buyers are lined up – but we aren’t seeing the corresponding gas sales agreements yet that commit firm supply for long term contracts at fixed prices to underwrite all these projects.    Meanwhile, first year production declines for new shale wells now exceed 70%.      Natural gas prices are currently lower than they were in the 1990s, even before adjusting for inflation.     And costs are rising – for compliance with new regulations around methane flaring and GHG emissions, treating lower quality gas in more remote areas, and dealing with water disposal. 

A few of us analysts, and at least a few members of the industry, have  suggested some downside risk planning might be in order for companies who are at risk if gas and related gas liquids prices, particularly ethane, rise past a “today plus inflation” curve.      The forward curve for gas, and appetite for liquid ethane suggests that at least a few market participants are listening. The contango is steep enough to spur interest in storage projects again.   

Even when it means higher producer prices, publicly forecasting any supply curve other than one that rises onward to the right is a risky thing for a consultant.     When Zeus asks Prometheus about the validity of the prophecy in “Kaos”, the cliff-bound god lies to him, while informing onlookers that it is, in fact, unfolding before their eyes.    As with a lot of things these days, what’s in the mainstream media is by no means the whole story of what’s really going on.    

In my cautionary tale, “the order” is the market domination of oil in the transport fuel sector, and the “family” is the group of legacy “fossil” industry advocates who insist that we can handle expanding domestic demand and growing export markets without a significant impact on US prices or future availability.    

I’ve heard, seen, and lived through this story before – the only reason that it’s worth taking a stance that publicly goes counter to the mainstream narrative is to try to ensure that at least some parts of the industry take action to guard against the risk of ruin so that they can be around to “rein in” Kaos and lead us to a better energy future.  

And of course, Cassandra can trade on her own prophecies whether anyone else does or not.   Long  Big Oil, long gas 2025 gas E&P calls, long big midstream.     

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Cassandra, in Greek mythology, Trojan princess who receives the gift of prophecy but is cursed to never be believed.

Quote from: Gloria Steinham, “The Truth Will Set You Free, But First It Will Piss You Off!   Thoughts on Life, Love, and Rebellion”.   Random House, 2019.