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North American Natural Gas Prices May Hit $7 by 2020

The increased role of global players and the use of long-term contracts may bring more stability to North America's natural gas market and offer a chance for a balanced market before the end of the decade, according to consulting firm A.T. Kearney.

In a new report, "With Fortunes to be Made or Lost, Will Natural Gas Find Its Footing?" the firm's consultants looked at long-term pricing for the gas market and analyzed "key actions" that they believe are needed for the industry to reduce volatile prices and reach a balanced market that gives incentives to producers, midstream operators, marketers and gas consumers. The authors also offered five scenarios to 2020 that could impact the balance of gas supply and demand.

"The North American natural gas market is structurally out of balance and cannot stay this way," said co-author Herve Wilczynski. "Speculative investment combined with diverging incentives and investment horizons have plagued the industry for years. There is some hope for the future: the increased role of global players and more prevalent use of long term contracts should bring some stability to pricing."

In the report's free markets scenario, gas market equilibrium should be reached by 2020 "in the $6 to $7 range," said co-author Patrick Haischer. "Any lower than that price and production from dry gas wells would not increase sufficiently to meet demand; any higher and demand from power plants will decline."

The gas markets aren't structured for short-term win-win scenarios, noted the authors. "Understanding what is going to happen requires understanding the players, their economics and incentives. The economic model that is the basis for the report analyzed the key participants in the natural gas supply and demand market and the dysfunction caused by each player too often focusing on only their interests."

In their review of the major natural gas players in the industry and individual outlooks, the authors noted that independent producers were "fond of short-term plays" with "an investment time horizon of just a few years. They can bring on capacity quickly and inexpensively, but if gas prices stay below $4,00/MMBtu, many players with predominantly dry gas portfolios will continue to struggle and possibly go out of business."

Meanwhile, the super majors, national oil companies and international oil companies "take a longer view on their investments and can afford to delay investment in certain parts of the world if local conditions are not favorable." Barclays Capital reported similar findings about the big producers based on a recent survey of 2013 spending plans (see Daily GPI, Dec. 5).

Midstream players also "have a longer view on investments and they take advantage of geographic and capacity-based market differentials to invest in pipelines, gas processing and fractionation," noted the Kearney consultants.

Potential gas exporters as well are eyeing opportunities to build liquefaction facilities "and take advantage of high prices abroad if the price spread between the U.S. and overseas markets stays above $5.00." However, the export plants "can cost up to $10 billion/Tcf and take a minimum of five years to permit and build," the study noted.

Others looking to take advantage of low-cost gas are chemical manufacturers, which use natural gas liquids (NGL) as feedstock, noted Wilczynski and Haischer. "Current natural gas prices make polyethylene cheaper to produce in the United States than anywhere in the world except the Middle East. Gas cracker and related downstream investments of $1-2.5 billion apiece are being evaluated, but the industry needs confidence in competitive ethane prices for the next 10 years."

Dow Chemical Co. last week became the latest to move forward with plans to build a $1.7 billion ethylene facility in Freeport, TX (see related story). Several other huge chemical industry projects recently have been announced along the Gulf Coast and elsewhere around the country to take advantage of low gas prices, including Sasol Ltd., which plans to build a massive gas-to-liquids facility in Louisiana (see NGI, Dec. 10).

Power generators also need low-cost gas to generate electricity competitively, they said. "If power generators knew for sure gas prices would stay below $6.00, they could begin replacing existing coal plants with gas plants more aggressively." Advocates for new opportunities to use compressed natural gas as transportation fuel see an opening, but "infrastructure plans require huge investments over long time frames."

"The encouraging news is that some of the natural gas market suppliers are already pairing up," noted Kearney partner Andy Walberer, who also co-authored the report. "Chemical companies are signing long-term ethane supply agreements with shale NGL producers and midstream companies. LNG companies are doing the same with the suppliers and their customers."

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