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Natural Gas: Will the Nation's Romance with Natural Gas Continue in 2013?

by Bob Shively, Enerdynamics President and Lead Instructor

This year — 2012 — was the year that the U.S. fell back in love with natural gas. Prices stayed below a very reasonable $4/MMBtu even as demand grew.  Power producers switched from coal to gas so rapidly that the percent of U.S. power generated by coal fell from 44% to 37% while gas generation rose from 25% to 30% in just one year. 

 

Numerous large industrial gas consumers made long-term commitments to new facilities in the U.S. based on belief in long-term reasonable gas prices.  And although it received relatively little fanfare during a news cycle dominated by the presidential election campaign, gas was largely responsible for the fact that U.S. energy-related greenhouse gas emissions are now at the lowest level since the mid-1990s. 

 

So how does the future look for 2013?  Will the romance continue, or will the blossom start to fade as the relationship deepens?  To attempt to address these questions we’ll look at issues of supply and demand, price, exports, the environment, infrastructure, and global perspectives.  

 

Supply and demand

Natural gas production in the U.S. is at an all-time high.  And current projections from the U.S. Energy Information Administration are that natural gas production will continue to grow significantly.  Often in the past, production has fallen in periods of ongoing low prices as producers reduce drilling.  Is it different this time?  Many observers say maybe yes.  Factors include improved drilling and production techniques that allow gas to be produced at lower costs, investment in production by consumers, the production of gas as a by-product of drilling motivated by oil or natural gas liquids production, and the potential for growing domestic and export demand.

 

http://www.eia.gov/forecasts/aeo/er/images/figure_10es.png

Source: AEO 2013 Early Release Overview (http://www.eia.gov/forecasts/aeo/er/early_production.cfm)

  

 

Demand is also expected to grow. While residential and commercial demand may be relatively static, industrial and power plant demand should be robust as long as price levels remain reasonable. Manufacturers of steel, machinery, chemicals, and fertilizers now have energy costs in the U.S. that are dramatically lower than costs in the other developed economies. According to the Wall Street Journal, Dow Chemical has compiled a list of 102 big new manufacturing investments in the U.S. that are due in part to low natural gas prices [1]. And many coal generating units, which have traditionally bumped gas generation out of the market, are going to be permanently closed. This will result in a permanent shift to gas generation even if prices rise. And lastly, there is the possibility of growing use of natural gas for transportation including fleet vehicles and long-distance trucking [2].

 

Price

Natural gas prices in the U.S. have remained at low levels for the last three years.

Source: http://www.eia.gov/dnav/ng/hist/rngwhhdw.htm

 

Given the current robust supply, futures prices reflect a market expectation that prices will remain low.  In fact, futures prices currently remain below $5/MMBtu until December 2018. But could we be fooled? It has happened before. Already contrarian investor’s websites can be found saying a cold winter and reduction in drilling rigs could result in a significant price rise. But given the current dynamics of the market this seems unlikely. Energy expert Daniel Yergin was recently quoted as saying that both demand and supply can grow for at least a couple of decades before we see significant gas price increases [3].

 

Exports

While gas prices in the U.S. have hovered below $4/MMBtu lately, prices in Europe are typically above $10 and in Asia above $12. This price difference, coupled with robust U.S. supply and a fleet of unused import LNG terminals, has become a clear recipe for natural gas exports. The U.S. Department of Energy recently released a report that concluded that exporting LNG would have broad benefits for the U.S. and would only minimally impact domestic natural gas prices [4]. Although the report’s conclusions are being disputed by industrial consumers who fear higher prices, it appears likely that the U.S. will approve numerous projects to convert LNG terminals for export capability. Most projects won’t be ready for exporting in 2013, but this will result in significant infrastructure spending next year.

 

 

Environmental issues

While natural gas has provided significant environmental benefits in shifting generation from coal to gas, and has the potential to do the same for shifting oil consumption to natural gas in transportation, the industry has failed to get the support of many environmental organizations and much of the public. Likely 2013 will be a year where concerns over fracking come to a head. Expect to hear a well-orchestrated campaign against fracking coming from some interest groups along with strong public concerns. More stringent regulation is likely, but it appears highly unlikely that concerns will lead to much slowdown in fracking activity. The benefits for the economy and the environment appear too great for fracking to be shut down. 

 

Infrastructure

Additionally, 2013 will be a year for billions of dollars of infrastructure investment. We have already discussed LNG export facilities. But even more money will go into pipeline expansions to move new shale gas production to markets and for safety upgrades in the transmission and distribution network. For example, the local distribution company in northern California, PG&E, is in the middle of a three-year, $2.2 billion pipeline enhancement project
[5]. Indeed, a Black and Veatch study on the natural gas industry showed that safety is the most important long-term issue across all sectors of the industry [6]. The need for such significant infrastructure will also lead to a need for workforce development as many of the experienced workers who built the last wave of infrastructure have now hit retirement age.   

 

The global outlook

The future of gas is not only rosy in the U.S. Economies throughout the world are looking to gas to provide low-cost and clean fuel to drive hopeful future economic growth.  Indeed, Exxon Mobil has forecast that natural gas consumption will overtake coal as the No. 2 fuel in the world by 2025, a mere 12 years from now [7].  Gas’ growth internationally has been held down by two factors.  Significant gas reserves are not located near the large economies of Asia and Western Europe, requiring expensive infrastructure investments for multi-national long-haul pipelines or LNG projects. This has led to the second key factor, which is producers’ ability to insist on long-term contracts with prices pegged to oil prices.  The result is natural gas prices being significantly higher than in the U.S. and less competitive with other fuels.  Whether this will change remains to be seen.

 

Conclusions 

Amazingly for an often pessimistic industry, the aforementioned Black and Veatch survey found that 92% of respondents were optimistic or very optimistic about the industry’s future growth. Yes, it appears that natural gas is likely to bloom at least in the near future. But as with all relationships, history tells us nothing is certain!


References:

 

1. Export U.S. Gas, Yes or No?, Wall Street Journal, November 15, 2012 http://online.wsj.com/article/SB10001424127887324595904578121242654761004.html

 

2. See All Roads Lead to Natural Gas-Fueled Cars and Trucks, Forbes, December 15, 2012 http://www.forbes.com/sites/kensilverstein/2012/12/15/all-roads-lead-to-natural-gas-fueled-cars-and-trucks  

 

3. See same WSJ article cited above

 

4. http://www.fe.doe.gov/programs/gasregulation/reports/nera_lng_report.pdf

 

5. PG&E Files Milestone Plan to Modernize, Improve Safety of Gas Pipeline System: http://www.pgecurrents.com/2011/08/26/pge-files-milestone-plan-to-modernize-improve-safety-of-gas-pipeline-system

 

6. 2012 Strategic Directions in the U.S. Natural Gas Industry

http://bv.com/survey/2012-natural-gas-report

 

7. The Outlook for Energy, a View to 2040 http://www.exxonmobil.com/Corporate/files/news_pub_eo.pdf

 

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