North American natural gas prices will gradually ease over the coming years and eventually return to sub-$5/MMBtu levels toward the end of the decade because of growth in liquefied natural gas (LNG) imports and U.S. and Canadian unconventional gas resources, Cambridge Energy Research Associates (CERA) predicted last week.
Major new LNG regasification projects will begin to come on stream in 2008, and as these new LNG supplies enter the market, North American price pressures will begin to ease, said Robert Ineson, who directs CERA's North American natural gas division. He issued the price briefing at CERAWeek 2006 in Houston. CERA is forecasting that LNG deliveries will outstrip continental gas demand growth between 2008 and 2010, which should send prices below $5.
"More than 60 North American regasification projects with a total potential capacity of more than 63 Bcf/d have been announced," Ineson said. "CERA projects total capacity will reach 16.8 Bcf/d by the end of the decade. Construction is already under way at several facilities."
Gas liquefaction capacity to supply North American LNG terminals is developing at a "steady clip," Ineson said. "Although LNG is likely to remain tight in the Atlantic Basin until late in this decade, current investments in new liquefaction capacity will increase global LNG supply significantly."
North American gas producers also are developing unconventional gas resources, including tight gas, shale gas and coalbed methane "at a frenetic pace, helping to offset the decline in conventional gas output," which in turn will bring prices down, Ineson said. "These efforts are raising total gas production substantially in key areas such as the Rocky Mountains and eastern Texas. Relative to 2004, CERA expects North American unconventional gas output to increase by 4.5 Bcf/d by 2010."
However, in the near term, demand for gas -- and subsequent high prices -- in the United States and Canada will exhibit "remarkable resilience." In the near term, "there will be little price elasticity in the residential, commercial and power sectors," said Ineson. "The industrial sector has already been pared back to a toughened core. Natural gas demand for power generation will grow despite ongoing price strength."
Ineson noted that "sustained natural gas price relief can occur only when demand is permanently destroyed or when substantial new sources of supply become available." Consumers will realize substantial price relief only if a significant increase is made in the supply of gas available to North America, he said, which will come in the form of LNG.
The gas price relief CERA is projecting "is by no means assured," Ineson noted. Many challenges to ease the pressure on gas prices remain, including increased competition for LNG supplies.
"LNG imports are not guaranteed because, as the key link in the emerging global natural gas market, North America must compete for incremental LNG supplies [with] Europe and even Asia," CERA noted. "As demonstrated in recent months, suppliers will divert available spot cargoes of LNG to markets where they can realize a higher price. North America will compete for that supply with countries around the world, some of whom simply need the gas more and are willing to pay a higher price for it."
Gas demand from the industrial sector, which is the largest consuming segment of the North American market, is forecast to slow through the end of this decade, but the decline will be gradual, according to CERA. "Strong product demand in the industries that rely heavily on natural gas has slowed the erosion of industrial demand for natural gas. Many gas-consuming industries are able to pass along higher energy costs to their customers."
Rising power sector gas use will drive total North American demand higher in the years ahead, according to CERA. Gas-demand growth in the power sector is "inevitable" as long as the economy grows. Other challenges to price relief include expected flat indigenous supply in North America, despite record levels of gas drilling activity.
CERA also is forecasting a continued "uncertain" political environment, which may pressure gas prices.
"As North American natural gas prices have retreated from their post-hurricane peak, the potential for legislative measures that would help boost continental natural gas supply or curtail demand has lessened. Congress is less likely to pass measures that would open to gas drilling any additional federal lands -- such as areas of the Outer Continental Shelf and the Rocky Mountains -- that are currently off limits to producers."
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