Demand between now and 2015 will prop up natural gas prices, even with a backlog of drilled wells awaiting connection, and from 2016 to 2018 a "dramatic structural increase" in demand could outpace supply additions and send gas prices to as high as $6.00/MMBtu, BNP Paribas' Teri Viswanath, director of commodity strategy, said Friday.
Around the shale patch, particularly in the Marcellus and Utica, there is an abundance of wells awaiting connection to infrastructure so their gas can flow to market. For now, that's an albatross around the neck of producer interests and gas-oriented investors.
In spite of this, "...demand will keep prices supported through 2015," Viswanath said during a conference call. "In particular, we see the longer-term pattern of structural electric power demand growth counteracting current gas-to-coal fuel-switching before the end of the year." Additionally, she said domestic capital spending in the industrial and petrochemical sectors will drive an increase in baseload gas demand.
At the beginning of this year's gas storage injection season, BNP reinstated its $4.00/MMBtu price forecast for 2013; however, with inventories now higher than expected the firm has cut its forecast to $3.70/MMBtu. The 2014 forecast has been cut from $4.50/MMBtu to $4.20/MMBtu, and Viswanath cautioned that "potential 'supply' headwinds could send prices back below $4.00/MMBtu again in 2015."
However, she said that "by next year, we expect the industry is going to rapidly cycle into a period of tightness. We see consumer demand outpacing production, and as such, we anticipate that the current slackness in the balances will be eliminated in a little over a year, with inventories falling to their lowest level in nearly a half-decade by...October 2014."
A particular bright spot is gas demand among power generators. "...[W]e see electric power demand returning to trend (that is, increasing) despite the gas price recovery we forecast for 2014," BNP said in a note Wednesday. "Notably, we expect electric power demand to grow by 0.44 Bcf/d in 2014. While this projection exceeds [the Energy Information Administration's (EIA)] estimate of a 0.18 Bcf/d y/y decline, it is relatively conservative compared to the average gains from this sector over the past decade."
During Friday's conference call, Viswanath said, "...if you think we're excited about 2014, well hold on..."
Taking a longer view, over the 2016-2018 period, "...structural demand growth appears likely to outpace supply additions, sending prices back to the upper limit of our projections ($6.00/MMBtu)."
Viswanath said over this period she expects to see demand growth among "all consuming sectors." This includes natural gas for transportation and especially industrial demand growth in light of numerous projects planned or under way to take advantage of relatively low-cost shale gas, not to mention gas-fired power generation growth.
Natural gas has pretty much won the new-build power generation game, beating coal on economics, with a predominance of gas-fired plants to be built over the next decade, Viswanath said. In 2004, only about 25% of the states burned at least 0.2 Bcf/d of gas to generate power; now nearly half of the states do, Viswanath said, citing EIA data.
The top five states for burning gas to generate power are Texas, Florida, California, New York and Alabama. No. 16, Ohio, burned about 0.46 Bcf/d to create power last year, marking a nine-fold increase from the 0.05 Bcf/d it used to generate power in 2004. A number of other states have charted similarly substantial gains in gas burn for power generation, according to EIA data cited by Viswanath.
Lending further support to gas prices in the years ahead is a slate of large-scale industrial projects, new-builds and expansions. The effect of some of these is being felt now. "Natural gas use for industrial purposes was more than 3%, or 0.6 Bcf/d, greater during the first five months of 2013 compared to the same period in 2012," Viswanath said. The increase reflects a stronger economy and low-cost gas.
Going forward, the greatest demand growth opportunity for natural gas is in the electric power sector, followed by the industrial sector in which economics favor reinvestment in U.S. industries, Viswanath said. And future exports of U.S.-sourced liquefied natural gas "will play an important role in domestic price formation," she said.
Natural gas vehicles are a longer-term and more costly outlet for U.S. natural gas supply relative to other demand sectors; however, the demand growth opportunity here is potentially larger than that available from the residential and commercial sector, according to a BNP presentation chart.
If that demand story isn't enough to make gas producers smile, Viswanath offered something for them to dream about.
"If natural gas were able to replace oil and coal in the U.S. fuel mix, it would require almost 77 Tcf of natural gas per year, or roughly triple the current demand," she said. "The largest sector of opportunity would be in transportation where almost 24 Tcf of natural gas would be required to replace oil-based products, gasoline and diesel fuel."