The only way to get rid of enough gas this year in order to keep supply from exceeding storage cavern capacity is for coal-fired power generators to back down like they did last year and make room for more generation from gas-fired plants, analysts at Barclays Capital said Tuesday.
“…[T]he only sizeable, price-elastic source of demand — gas displacing coal in power generation — must again balance the gas market this year,” Barclays analysts wrote. “Coal displacement needs to run at 80% of the 2009 coal displacement levels to avoid filling storage beyond capacity.”
Noting that “those pesky unconventional wells can outstrip even the highest expectations,” the analysts revised their 2010 production forecast from a 3% decline from 2009 levels to a 3% increase. The group’s 2010 price estimate has been cut to $4.17/MMBtu. For the second and third quarter their expectation is for $3.50/MMBtu, rising to $4.75/MMBtu in the fourth quarter to reflect “a modest winter premium in a market with domestic supply still growing into winter.”
The $3.50/MMBtu in the second quarter is how low gas will have to be priced in order to displace a sufficient amount of coal-fired generation, the analysts predicted. “Simply put, there is too much gas supply relative to demand to not force surplus gas to be used in the market’s sump: coal displacement,” they said.
“The volume of coal displaced is a nonlinear function of gas price, and apparent displacement in 2009 was lower than theoretical, indicating that must-burn coal and other factors leave some coal plants running at times even when gas prices are low…What if plant operators do not back down coal burns to run gas instead? In this unlikely scenario, there is insufficient storage to accommodate the surplus gas.”
Coal-to-gas switching was prevalent last year among power generators but not just because of the relative prices of the two fuels. Reduced demand for power from industrial consumers, which was driven by the economic recession, had a greater effect on coal-fired plants than on their gas-fired cousins, Barclays said last year (see Daily GPI, Dec. 3, 2009).
Longer term, others have looked at the displacement of coal-fired plants by cleaner gas-burning ones as a means of reducing carbon dioxide (CO2) emissions. In “Displacing Coal with Gas Generation from Existing Natural Gas-Fired Power Plants,” which was published in January by the Congressional Research Service, author Stan Mark Kaplan, a specialist in energy and environmental policy, looks at the factors that would influence a shift from coal to gas in the power sector.
Such a shift is not a given, argue economists at The Brattle Group in the recent report “Prospects for Natural Gas Under Climate Policy Legislation: Will There Be a Boom in Gas Demand?” They argue that relatively high carbon dioxide price levels are needed for coal-fired power generation to be materially displaced by gas-fired generation (see Daily GPI, March 24).
In the nearer term, though, in one bright spot for domestic gas producers, the analysts nudged downward their forecast for liquefied natural gas (LNG) imports this year. They now expect 3 Bcf/d to come to the U.S., an increase of 1.8 Bcf/d from the 2009 level. “While global LNG supply is running 7 Bcf/d above year-ago levels, ahead of our forecast, Q1 ’10 imports were dampened by cold weather in other countries that boosted their LNG takes, causing our annual average 2010 U.S. import number to fall somewhat,” they explained.
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