Low prices are making natural gas an attractive buy for power generators, but — despite recent forecasts to the contrary — coal might not take a back seat to gas in 2016, according to FERC staff.

Total U.S. natural gas demand grew only 1.3% in 2015, driven by a 3.8% growth in power burn, according to the latest State of the Markets report from Federal Energy Regulatory Commission staff.

“Natural gas demand exceeded the five-year range during the summer due to an 18% increase in summer power burn over the summer of 2014,” according to the report. “Due to low natural gas prices, for the first time in U.S. history, natural gas power generation surpassed coal-based generation in both a quarterly and monthly basis.” And long term demand growth for gas will likely come from increased gas-fired electric generation, particularly in the Southeast, along with growing industrial demand, liquefied natural gas (LNG) exports, and pipeline exports to Mexico.

But do the report’s authors think that 2016 will be the first year during which, for the year, more power will be produced from natural gas than from coal?

“We don’t have an analysis suggesting that projection, so I’m hesitant to claim that we can make a firm statement on that,” said Alex Ovodenko of FERC’s Office of Enforcement.

The Energy Information Administration (EIA) said just a day earlier that it expects gas-fired generation this year to exceed coal generation in the United States on an annual basis (see Daily GPI, March 16).

Natural gas became the leading fuel for domestic power generation for the first time in April 2015 and established itself as the leading fuel for electricity for the second half of the year (see Daily GPI, Dec. 28, 2015; Dec. 2, 2015; Oct. 28, 2015). Generation shares for natural gas and coal were nearly identical in 2015, each providing about one-third of all electricity generation, EIA said. The agency expects natural gas to provide 33% of electricity generation this year, compared to 32% from coal.

Electric power demand for natural gas increased from 22.32 Bcf/d in 2014 to 26.5 Bcf/d in 2015, according to EIA (see Daily GPI, March 8a). The agency expects power demand for gas to reach 27.29 Bcf/d in 2016 before falling slightly to 26.82 Bcf/d in 2017.

The big natural gas story of 2015 — sagging prices — was driven by fundamental changes in the North American gas market, according to FERC’s State of the Markets 2015 report.

“With the exception of the Northeast, including New England, regional price differences across the country were not large, a sign that midstream investments over the past 10 years have largely relieved natural gas transportation constraints. However, insufficient pipeline takeaway capacity in the producing regions of Ohio, West Virginia and Pennsylvania has led to a local gas surplus in the area, resulting in lower prices for producers. In contrast, pipeline constraints near Algonquin Citygates at Boston, Transco Zone 5 in the Mid Atlantic, and Transco Zone 6 New York, resulted in higher prices for consumers in 2015. Still, prices at these demand hubs decreased substantially from the previous year due to the warmer than normal winter, greater LNG imports, and increased production close to the region.

“Staff analysis indicates that new capacity additions should significantly relieve transportation constraints in these regions by 2019 if projects that are planned and under construction are approved and completed by the scheduled in-service dates. The outlook for 2016 continues to point to low prices because of continued strong production and high storage.”

Production growth in the Marcellus and Utica shales has resulted in the addition of 51 Bcf/d in new pipelines in the past five years and approximately 49 Bcf/d of capacity is proposed or planned to come online by 2018.

Domestic natural gas production, which has increased an average 3.6% annually since 2010 to a record high 72.6 Bcf/d in 2015, may have plateaued and be on the verge of a decline, FERC staff said. But the nation’s robust shale plays should help production to rebound with eventual rising prices.

“The North American natural gas market will likely remain oversupplied and prices low in the near term, pushing high cost producers out of the market. However, as producer prices recover, there appears to be ample low-cost resources waiting in the wings, with some producers in the Marcellus and Utica shales reporting a $2.50/MMBtu or lower breakeven price…As natural gas demand increases and prices rise, additional supply can be brought online relatively quickly because shale gas projects in well established areas require relatively less lead time than conventional projects.”

Lower 48 LNG exports, still in their infancy, have the potential to become a source of future natural gas demand growth. The first cargo of LNG from the U.S. mainland shipped from Cheniere Energy Inc.’s Sabine Pass terminal on Feb. 24 (see Daily GPI, Feb. 24). While it is difficult to predict LNG export volumes in coming years, FERC staff said exports could reach 8.5 Bcf/d by 2020, “once all of the six terminals where construction has begun or which have secured funding are completed.

“However, the long-term success of American LNG exports remains uncertain. The U.S. could add approximately 15% to world liquefaction capacity in a market that is currently oversupplied. New entrants in Australia are also bringing online significant new capacity into a global market that is already soft as demand for imports into North America and Asia weakens” (see Daily GPI, March 8b).

Trading of natural gas financial products on InterContinental Exchange (ICE) fell 10% in 2015, while ICE physical trading increased 1%, ending a four-year downward trend. “Financial trading volumes on ICE still significantly outweigh physical trading volumes, but they have fallen at a faster rate than physical trading volumes,” according to FERC staff. Physical gas trading on ICE rose to 10.6 Tcf in 2015, but it is down 21% since it peaked at 13.8 Tcf in 2010.

Financial trading on ICE fell to 404 Tcf last year, a 46% decline from the 2011 peak of 746 Tcf. Most of the decline can be attributed to the Nymex Henry Hub futures lookalike product, ICE’s largest financial product. “Low and stable natural gas prices have reduced market activity, and the decline in trading follows larger financial industry trends,” FERC staff said.