For producers -- and anyone else who prefers that gas prices are higher rather than lower -- the good times won't arrive until 2013. But then prices could shoot up as high as $10/MMBtu on demand strength coupled with constraints in the rig and oilfield services sector, while global markets draw liquefied natural gas (LNG) away from U.S. shores, according to analysts at Wood Mackenzie.
"Shale gas availability does not preclude short-lived prices as high as $10 in 2013-2014," the firm said last Friday. "Federal carbon [emissions] legislation, rapid coal [-fired power plant] retirements or weather events could push prices toward this level.
"Beyond that transition period, cost pressures subside and prices return to the $6-7 long-run cost of domestic production. U.S. production of 70 Bcf/d or more is feasible with the large resource base."
But until then gas market bulls would probably hibernate if they could. For now the industry is in an era of burgeoning supplies and increased productivity at the end of an economic recession (or beginning of a jobless recovery). While LNG cargoes have yet to arrive in the abundance that many have been predicting for years, Wood Mackenzie analysts insist that they're on their way beginning next year as new liquefaction projects come online around the world from 2010 through 2015.
Flexible LNG cargoes are being drawn to North America now by attractive netbacks. This trend grows and then peaks around 2011 and hits a fairly steep decline in 2013, according to Wood Mackenzie. Stronger prices in Europe and incremental demand growth in the Pacific Basin will be what draw the cargoes away.
Add to the current North American oversupply picture a spate of new coal-fired power generation in the United States -- a 20 GW last hurrah, according to Wood Mackenzie -- slated to come online over the next two years or so. These plants will serve to keep a lid on gas prices, and they won't be backed out of the market by temporarily more economic gas-fired plants the way their older, less-efficient coal-fired ancestors were earlier this year, which led to a roughly 2 Bcf/d increase in gas demand, according to Wood Mackenzie.
The biggest slug of coal-fired power plants hits the market next year, nearly 7.5 GW worth. The nearly 20 GW being added this year through 2012 is enough to shave 3 Bcf/d from power generator gas demand, according to the Wood Mackenzie analysis.
Near-term growth in coal-fired power generation is just one of the reasons the current gas market can be described as "demand constrained," in the words of Teri Viswanath, Credit Suisse director of commodities research. For this year her firm cut its U.S. gas price forecast to $4.97 from $5.01; for next year Credit Suisse cut its forecast to $4.67 from $4.70, Viswanath said last Thursday.
"Over the near term we expect that the relatively stable level of supplies during the core heating season will result in very high storage levels by the start of next year's injection season," she said. "In fact, we foresee the industry ending the winter season with 1.8 Tcf in storage, which will likely further depress prices through next year's injection season."
The likelihood of a sustained rally in gas prices is limited as Credit Suisse expects production that was either curtailed or deferred will be brought back online this winter, Viswanath said. "Further, high-grading and the recent increase in drilling activity will eventually bring new supplies to market during the upcoming year," she said. "We expect that the combination of these factors will limit U.S. production losses in 2010.
"...[S]luggish demand growth next year coupled with higher domestic reserves should keep prices depressed" (see related story).
In its longer-term view, Wood Mackenzie sees plenty of support for prices. While shale gas is plentiful, growing demand from gas-fired power generators in 2013-2014 will drive producers farther away from the core areas of the sweetest shale plays in order to grow supply, said Jen Snyder, Wood Mackenzie's principal analyst for North American gas research. This will place upward pressure on costs, prices and price volatility, she said.
But after 2014 Wood Mackenzie expects relative calm to return to the market as supply catches up with demand. The firm's long-term Henry Hub gas price forecast is $6.50/MMBtu.
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