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Industrials, LNG Export Seen Leading Demand Growth

Interests that are long natural gas won't have to wait too much longer for some demand dynamism to come to the gas market, according to analysts at PIRA Energy Group, which recently completed a client-sponsored study of "demand implications of the shale revolution."

PIRA's reference case anticipates that "the call on U.S. gas supply" will grow by about 37.5 Bcf/d from 2013 to 2025. "In 2025, the call on U.S. production reaches about 104 Bcf/d -- a number requiring unprecedented growth," the firm said in its study.

Industrial demand growth and liquefied natural gas (LNG) exports will lead the demand response to growing domestic supply, according to PIRA. Exports of natural gas to Mexico and natural gas vehicles (NGV) also will play a role. So will power generation, but that won't be as significant as some might be expecting, said PIRA's Richard Redash, managing director of North American natural gas.

Low natural gas prices did a lot to bring forward demand growth for gas in the power sector, Redash told NGI. The industry borrowed demand from the future, so to speak. "What should clearly stand out to everybody is that 7 Bcf/d increase in gas consumption for electric generation that took place between 2008 and 2012, as underscored by that 25 Bcf/d [of demand] high-water mark we reached last year," Redash said. "Here we are now with modestly higher gas prices...and we're looking at losing 3 Bcf/d of that."

The lesson is "easy come, easy go" in the power generation column of the gas demand ledger. A price-driven response is quick to materialize, and quick to wane. Higher gas prices after 2015 will require a rethink on where natural gas fits with coal in the power generation sector, Redash said.

"We're looking at gas demand growth in the power sector struggling to climb much more than 2 Bcf/d between now and 2019, struggling to get back to that price-induced apex last year...This year we're probably going to be somewhere between 21.5 and 22 Bcf/d, getting back up toward 25 Bcf/d by late this decade, early next decade."

The economy has recovered, but demand for power has not kept up, partly due to efficiency gains and demand-side management in the power sector, Redash said. However, industrial demand for gas has a more bullish outlook, even if it takes longer to show up than did the price-induced response on the power side. "Capacity-driven projects, by definition, require more time, more capital, more planning, greater clarity, greater confidence, etc.," Redash said. "We see the industrial sector ultimately taking out the 1997 peak of more than 23 Bcf/d before the end of this decade" and topping 24 Bcf/d by 2020.

According to PIRA's analysis, the United States will be exporting "a bit more than" 5 Bcf/d of LNG by 2019, with that figure rising to a little more than 8 Bcf/d by 2025, Redash said. PIRA uses a facility load factor of about 90% in its analysis. Including the fuel required for liquefaction, electricity and other terminal needs adds about 11% to the export figures, Redash said. That plant fuel gets counted in the industrial demand category, creating some crossover benefit of LNG exports.

By 2020, PIRA expects gross LNG exports of 6.3 Bcf/d and net exports of 6.15 Bcf/d, which reflects imports that are still expected to arrive at GDF Suez Gas NA's facility in Everett, MA.

For the most part, terminal development will be in step with the market, Redash said. "I don't envision these white elephants along the lines of what we saw in the case of regasification facilities. I think market forces will dictate to what extent you see some slippage in the construction of projects...I think right now there's enough in the way of project inertia in place to all but ensure a significantly larger call on supply awaits the U.S. market as we look out over three years or so."

Looking out further, there's even more to be enthusiastic about on the demand side of the gas ledger.

Take Mexico, for example. There are plenty of natural gas reserves south of the border, but Mexico does not yet have the capital and capabilities to develop its gas reserves, particularly while the country is more focused on its crude oil treasury (see related story).

"...[T]he potential is clearly there for Mexico to expand gas production domestically, but that being said, there's obviously a capital consideration in terms of how much money do they have to fund both oil and natural gas development and therein lies the problem," Redash said. Hence, exports of U.S. gas have ballooned lately and are expected to continue growing. He said Mexico appears to be following a 10-year plan that gives U.S. interests some idea of how long and wide the natural gas export window to Mexico will remain.

"I do think as you look out toward the next decade, one has to pay some heed to the prospect that they will have increasing gas production in place within Mexico," he said. "At the same time, we don't think that will be enough to preclude continued growth in pipeline exports from the U.S. to Mexico," he said. "...[W]hat we're looking at here is pipeline exports, which have doubled over the past two years to around 2 Bcf/d, continuing to advance, approaching...4 Bcf/d or so by 2020. By PIRA's calculations, Mexican imports of U.S. gas will grow to about 5 Bcf/d around 2025 or so.

Natural gas demand growth in the transportation sector is less imminent, but it is still significant, and substantial when one considers where the market is starting. "Certainly we see that there's going to be significant uptick in demand from the transportation sector," said Nina Fahy, PIRA director of North American natural gas.

The domestic transportation market is expected to climb to about 2.5 Bcf/d by 2020 and about 5 Bcf/d by 2025. "That's incredibly substantial considering that today volumes in the market are actually closer to 100 MMcf/d," she said. "Especially between now and 2020, fleets are going to be the end-users that are going to drive this demand for natural gas in transportation. They will be followed eventually by the long-haul trucking market; 2014 is going to be the critical juncture for long-haul use of natural gas..."

That's because 2014 will see the significant rollout of the Cummins Westport 11.9 liter natural gas engine in the long-haul trucking market, Fahy said. The engine will fill a void between the current 9 liter and 15 liter offerings. "There's been significant interest in the engine," she said (see related story).

While much of the media attention given to NGVs is focused on the on-highway market, the rail market offers substantial growth, too. Class I railroads, which are the major rail lines, spend about $14 billion on fuel annually, primarily diesel. Most of that is consumed by locomotives, but some of it fuels railroad company trucks and other equipment, Fahy said. 

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