With the downturn in global oil prices and the glut of natural gas that continues to flood domestic markets and hold down prices, there remain significant concerns about demand for Appalachian gas in coming years, according to several experts that spoke at an industry conference in Pittsburgh last month.
"We think these cold winters in recent years kind of helped mask our oversupply, and now we're thinking longer term what's that going to do to the supply/demand picture," said Mark Eisenhower, vice president of strategic planning and development for utility Aspire Energy of Ohio.
A warmer-than-normal winter on the East Coast, a weakening global economy and the commodities downturn, Eisenhower told an audience at Hart Energy's Marcellus-Utica Midstream conference, has his firm and others modeling for a lower for longer price environment.
About 20 Bcf/d of incremental demand for natural gas is expected between now and 2025, Eisenhower said. Liquified natural gas (LNG) exports account for the bulk of that at 11.6 Bcf/d, followed by natural gas-fired power generation at 5.2 Bcf/d and about 3.2 Bcf/d from industrial demand.
"All we're trying to say is, if the actual [LNG] shipments don't occur or we don't have a little more colder weather that would blow the top off of this, you're oversupplied," he said. "The 'what if' scenarios don't mean we're right; it's just ask yourself that question when you're doing strategic planning. When we make an investment, we're looking at a use-of-life for assets of 20 years."
As rig counts have plummeted by more than 60% since September 2014 when oil prices collapsed, Sunil Sibal, a senior infrastructure analyst at Seaport Global Securities, said that production from the Marcellus and Utica shales grew by 5 Bcf/d from 2014 to 2015. Even with operators scaling-back, he said both plays are expected to add another 14 Bcf/d of production by 2020.
But with Asian markets faltering, emerging markets not as strong as they have been in recent years and market segments like natural gas for transportation not taking off, analysts aren't so sure that power generation and LNG exports will be enough to spark the kind of demand producers are hoping for in the next three years or so.
"You have to have demand to keep these commodity prices up and that's difficult to do when you look at uncertainties in the global economy," said Ponderosa Advisors LLC CEO Porter Bennett.
About 19 Bcf/d of new pipeline capacity is expected to come online by 2018 in the Appalachian Basin to help meet demand, but now some are worried about an overbuild.
"Pipeline capacity in some areas is currently constrained, but if you look at the current projects you have to select which projects you think will be successful," he said. "If you look at the capacity that's scheduled to come online between now and 2018, there will be more than sufficient capacity based on some of these production profiles."
Eisenhower added that there might be an opportunity during the downturn for producers to better coordinate with end-users. He said more utilities have been investing in the upstream with production payments or prepaying for reserve acquisitions.
"The utility has the rate base. At the end of the day, all of those capacity payments go to the rate base and get recovered," he said. "With producers, they have no means of recovery, especially in a compressed price market place. So, you have to get creative and think about solutions in that environment."
Sibal said "help is on the way," however. More balance is expected in the natural gas liquids market. The first Marcellus Shale ethane is expected to be shipped overseas this month from Sunoco Logistics Partners LP's Marcus Hook Industrial Complex. More crackers are expected to come online on the Gulf Coast, as well, which would help drive more demand for ethane. And refineries, he said, are expected to use more butane for fuel-blending in order to meet tighter federal air emissions regulations.
The power generation segment, Eisenhower said, has enormous potential, but there remains uncertainty about how many facilities will be built and how much consumption will rise among consumers that are using more efficient appliances in their homes. He added that natural gas as a transportation fuel is expected to account for more market share in the future, but for now is not enough to help push demand higher.
"Outside of exports and power, I really don't see anything that's a material mover," Eisenhower said of the near-term. Other speakers noted that while operations continue to slow during the downturn, now is the time to increase dialogue about generating more demand for oil and gas. That conversation, Eisenhower said, is about 10 years overdue.