U.S. natural gas prices would need to rebound to $5.50/MMBtu or higher, or coal-to-gas switching "is here to stay," according to a report by Tudor, Pickering, Holt & Co. Inc. (TPH).
Analysts Brandon Blossman and George O'Leary predicted that prices for gas and coal could be linked through 2012, which would lead to about 3 Bcf/d in fuel switching in the power generation sector. For the past few years, they said, switching has ranged from 2 Bcf/d to 3 Bcf/d.
"Gas-fired generation has steadily gained market share since the 1990s, driven first by a gas generation overbuild [and] more recently by the collapse in the coal-gas price spread," said the team. "Going forward, we expect incremental power demand to accrue to gas generation (ex-renewable additions)," which "implies little to no changes in power-generation coal demand."
An overabundance of gas-fired generation capacity, which began with new builds in 2000 as well as cheap shale gas and high-priced coal in the Appalachian region have driven coal and gas-fired generation into direct competition, according to the TPH team.
Gas prices have fallen relative to coal prices because of shale, they said. And current coal prices have led to competition that "starts at $5.25/MMBtu and increases through $3.25/MMBtu," they said.
Coal-to-gas switching ranged from 2.5 Bcf/d to 3.0 Bcf/d from 2009 to the end of 2010, the duo said. From January through March of this year switching averaged about 2.8 Bcf/d, "on a coal-gas price spread similar to 2009 averages."
However, the combined-cycle natural gas fleet in the United States only averaged a 40% utilization rate in 2010, the analysts said. If the fleet's capacity were to jump to 70%, it would add an estimated 12 Bcf/d of incremental gas demand and a 60% increase in gas-fired power generation.
For the longer term, expect to see some "unwinding of price-driven switching," which would be offset by incremental power demand.
Meanwhile, eastern coal prices have risen, mostly because of sustained operating cost pressures in Appalachia.
Supply cost, rather than demand, "is the main driver for eastern coal prices in the U.S.," the analysts said. "In addition, Appalachian coal production has been on a steady decline for many years...More challenging geology both increases cost and reduces production." Coal output in the region fell to 340 million short tons in 2010 from 400 million short tons in 2005.
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