The western United States may on the brink of an upsurge in natural gas demand outstripping supply, which would require new infrastructure, a panel of experts said last week at the LDC Gas Forum Rockies & West in Los Angeles.
WPX Energy Inc.'s Alan Killion, west region marketing director, said between now and 2018 "gas demand is going to outstrip supply, predominantly because of power generation" (see related story). Canadian supplies virtually will be "drying up" for the U.S. Northeast and Midcontinent. "There are a lot of things changing in the West, including increased demand for exports to Mexico."
EDF Trading North America Senior Vice President Jeff Welch projected growth mostly in the West and in Mexico of 2-5 Bcf/d over the next five years that would come in "chunks." Demand is "heading West." With a "very, very strong east-to-west push," the clear implication is that a lot of infrastructure will need to be built.
"To the extent that proposed LNG [liquefied natural gas] projects in the West move forward, that is going to require more infrastructure to make that happen," said Bentek Energy's Justin Carlson, senior manager for North American natural gas analysis. The Rockies have plenty of additional supply to meet new demand, he said, but likely will require another east to west pipe system because there is not much extra capacity on existing lines. He also thinks there may be a push for Rockies gas to flow east to Midcontinent markets in the Chicago area.
Even if there are additional supplies headed West, capacity limitations are real, according to Southern California Gas Co. (SoCalGas) gas acquisition manager Steve Baird. "It is pretty much Kern [River Pipeline] and Ruby [Pipeline] right now...In order for us to enjoy the price advantages of these supplies, we would have to have the gas come south into Transwestern or El Paso's interstate lines...It seems like that is the only way we are going to get that gas out of that area."
SoCalGas buys about 1 Bcf/d and it holds firm capacity on various interstate pipelines for about 1 Bcf/d. "We'll always hold a lot of capacity," Baird said. "We're conservative, and it is just like we hold storage, and we love having it as a hedge of prices...I would prefer to have some more pipeline expansion, however, particularly from the Rockies and Canada. That gas is pretty darn cheap, and it would be nice to have added capacity from there."
Gas supply and demand should continue to be robust through the next 10-12 years, but what this could mean for future prices and volatility is up in the air. Welch said the Southern California (SoCal) hub has become "the premium pricing point" nationally. "As we gravitate toward more normalized pricing, we find the 12-month strip of SoCalGas reflective of that. On an average basis today, this is one of the better price areas in the country."
There is a strong east-to-west push, and a strong north-south push "that are turning the country upside down," creating "incremental growth opportunities" along the Texas Gulf Coast, in West Texas and desert Southwest regions. All of this is significant, he said. "Whether it is looping of existing pipelines or construction of new lines, new capacity is going to be required in this part of the country to serve new growth and market demand."
Baird said "down the road we may have the most expensive gas, but it will still be relatively cheap."
America's Natural Gas Alliance's (ANGA) Paul Smith, senior director for infrastructure, said the onslaught of robust onshore shale production virtually has made price volatility "a thing of the past." Shale's importance "is not just in contributing to long-term affordability for gas, it is equally important that it has meant the elimination of volatility for the most part." Smith said he began working in the industry as a day trader and realized that lessening volatility has "taken some of the fun out of the industry because we just don't have the basis spreads to play with like we used to. But that is what shale has done, it has essentially eliminated price volatility except for a few places around the country that still have pipeline constraints."
On a global basis, Macquarie Securities Group's Vikas Dwivedi, global oil and gas strategist, said there are great opportunities but also great risks for U.S. producers, particularly for exporting natural gas liquids (NGL) and crude oil. There continues to be "big global growth in NGL production, so the U.S. producers are facing a lot of competition worldwide," he said. A key question is at what price can the U.S. continue to export its propane, ethane and other NGLs?
"For the last five years our data shows that light crude oil, ultra lights and NGLs have been outpacing heavy sour crudes [worldwide] that before were looked at as the benchmark for global oil supplies," Dwivedi said.
Overall, Macquarie is "quite bullish" on global oil prices staying above $100/bbl during the next few years, particularly Brent prices. "We think Brent prices will stay in the $105 or higher range," but West Texas Intermediate "is going to be a tale of two periods. The next two years we should see very good pricing -- $100-plus -- but after that things get very dicey because production just keeps growing, and U.S. refineries just can't take any more. You can't keep adding 1 million b/d year after year. Every place in the U.S. is already fully saturated, storage is full, and producers are sort of in a box," he said.