As gas-fired power plants take up the slack for substantial retiring coal-fired generation and gas producers are able to back off from drilling merely to hold production, gas prices will get a lift, Credit Suisse Commodity Research Director Teri Viswanath told NGI Tuesday.
Viswanath is looking for gas prices to average $5.25/MMBtu at the Henry Hub during 2011 and $5.85/MMBtu during 2012. Those numbers might not feature in producers’ wildest dreams, but $5.85 in 2012 beats the New York Mercantile Exchange strip, and the outlook is decidedly bullish compared to recent estimates from Bentek Energy LLC and Barclays Capital.
Bentek, well respected in the industry for its monitoring of pipeline flow volumes across North America, last week said prices would average about $5/MMBtu at the Henry Hub for the next five years (see Daily GPI, July 20). Barclays has been more pessimistic about gas price recovery. Last month the firm’s analysts repeated their expectation that 2011 prices would average $4.10/MMBtu (see Daily GPI, June 15).
Bentek’s prediction has caused a stir among natural gas investment analysts. The Nymex futures screen shows prices rising steadily over the next five years to close 2010 at $5.11, 2011 at $5.70, 2012 at $5.91, 2013 at $6.12, 2014 at $6.33, and 2015 at $6.60. But in Bentek’s view the screen doesn’t get it, at least not yet.
“The Nymex futures strip through December 2015 currently averages $5.76,” Bentek said last week. “The futures market has not fully adjusted to the fundamental changes that are expected to take place.”
Production will be driven higher by producers forced to drill to hold leases, Bentek emphasized, but Viswanath believes this phenomenon will pass within about a year. While producers will have more discretion over their drilling activities, a more interesting story is unfolding on the demand side with power generation, she said.
“I think the fascinating story happens to be on the electric power side,” Viswanath said. “It’s relatively impressive that in the ’90s we retired roughly 4 GW of coal generation, and the announcements right now show that we have 20 GW online for retirement between 2010 and 2020.
“We’re seeing that retirements are occurring at a faster clip, so really the upward band on [coal-fired power plant] retirements could be 40 GW of retirements. We see gas taking the lion’s share of that.”
For those wondering how long the gas industry will be crossing its “bridge years” from the high prices of 2008 to the next period when “prices better reflect true lifting cost economics,” Viswanath suggests that the inflection point will be in 2012. While 2011 doesn’t offer much to get excited about, “2012 becomes sort of interesting,” she said.
For instance, 2012 is the first year that new emissions restrictions under the Environmental Protection Agency’s recently proposed Transport Rule would take effect. The rule would require 31 states and the District of Columbia to significantly improve air quality by reducing power plant emissions that contribute to ozone and fine particle pollution in other states.
“Emissions reductions will begin to take effect very quickly, in 2012 — within one year after the rule is finalized,” EPA said. “By 2014, the rule and other state and EPA actions would reduce power plant SO2 [sulfur dioxide] emissions by 71% over 2005 levels. Power plant NOX [nitrogen oxide] emissions would drop by 52%.”
That’s good for gas, not so much for coal. This combined with a “more reasoned approach to drilling” that’s not driven by the need to hold acreage will make for a better year for gas prices, according to Viswanath, possibly the first of at least several years of stronger prices. The much talked about “gas factory” will be in ascendancy. Producers will enjoy an ability to respond to prices by tweaking production to a degree they haven’t had in the past, she said.
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