NGI The Weekly Gas Market Report / NGI All News Access

NatGas Demand May Push Prices Higher

The pieces are in place to gradually lift natural gas prices over the next five years, and the gas market is proving that free markets, capitalism and economic fundamentals still work, Raymond James & Associates Inc. analysts said in a note last week.

Pushing gas prices higher will be industrial demand, coal-fired power plant retirements, liquefied natural gas (LNG) exports and exports of gas to Mexico. Combined, projects in these four categories will increase gas demand by 7-12 Bcf/d between now and 2017, making for annual demand growth of about 3% relative to U.S. demand of 70 Bcf/d in 2012, the analysts said.

"The industrial demand and power generation sectors account for the lion's share of this U.S. natural gas demand growth, representing approximately 64% of total U.S. gas demand in 2012," the analysts said. "Industrial gas demand is set to grow 4% to 8% (0.75 to 1.5 Bcf/d) annually. With the U.S. natural gas forward curve [prices] indicating another three to four years of sub-$5/Mcf U.S. natural gas prices, there is a clear incentive for gas intensive manufacturers, petrochemical, fertilizer, methanol, gas-to-liquids, and other gas-intensive industries to ramp-up their U.S. operations," the analysts said.

No major economy has more cheap natural gas than the United States, according to Raymond James (and others). And many global industries are using more expensive oil as a feedstock. "That means the U.S. industrial gas consumers should be some of the biggest beneficiaries of this cheap U.S. gas," the analysts said.

In the power generation sector, demand is expected by Raymond James to grow 3-5% (or 0.65 to 1 Bcf/d) annually, driven by coal retirements. Low natural gas prices coupled with stricter emissions regulations at the Environmental Protection Agency are expected by the analysts to lead to a sharp increase in coal-fired power plant retirements.

"As of today, we estimate there are 30-33 GWs [gigawatts] of announced coal-fired capacity retirements, which could equate to 2-3 Bcf/d of potential additional gas demand by 2016 and another 10-12 GWs beyond 2016 (or another approximately 0.75 Bcf/d)," the analysts said. "While some of these announcements may be reversed if market conditions improve for coal power plants, it appears that more units will lean toward retirement over the next few years."

Renewables or gas-fired plants will replace the retiring coal units if gas prices stay below $5 for the next five years, as Raymond James expects, the analysts said.

"Currently, we expect natural gas will also capture three-quarters of the modest 0.5% expected annual growth in total U.S. electric demand, the rest coming from renewables. Thus, all together, if the expected 50 GWs of coal-fired capacity expected to be retired by 2025 actually comes to fruition, this could represent an additional approximate 4 Bcf/d of incremental gas demand by 2017," they said.

There are political and other hurdles to LNG exports, and even when these are overcome, the economics of exporting LNG aren't as attractive as they might seem once the costs of liquefaction, shipping and other items are included, the analysts said. Brownfield LNG liquefaction and export projects have the edge where economics are considered due to their lower costs, the analysts said.

"...[T]he size of the U.S. economy and population base means that the U.S. will not overtake either Qatar or Australia as an LNG exporter in absolute terms, but the U.S. has the potential to become a significant player in the global LNG market by 2020. Canada, with five projects (totaling around 9 Bcf/d) in development, can also become a sizable player, and of course Canadian gas demand naturally affects the North American supply/demand balance," the analysts said.

U.S. gas exports to Mexico should increase 15-25% (or 0.4 Bcf/d) annually over next five years, Raymond James said. "Given the fact that U.S. companies have announced several additional pipelines bringing more gas to Mexico, it looks like this trend has some legs [see related story]."

The forward curve is underestimating demand beyond 2016, the analysts said. "Depending on the timing of certain projects, we could see a sharp gas demand surge in 2015 or 2016 that even leaves the U.S. gas market temporarily short of gas...All in, we expect U.S. gas prices to firm steadily over the next several years with upside bias to our current long-term Henry Hub price forecast of $4.25/Mcf. Don't rule out the possibility of a short-lived gas price spike in 2015/16 if surging demand temporarily outpaces the industry's ability to bring new supply on line."

©Copyright 2013 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.

Copyright ©2018 Natural Gas Intelligence - All Rights Reserved.
ISSN © 2577-9877 | ISSN © 1532-1266
Comments powered by Disqus