Substantial growth in natural gas demand amidst low prices and gushing supplies eventually will be realized, but on a phased five-year basis (2015-20) that will keep price increases modest, according to a report released Tuesday by Barclays Research. In the meantime, demand growth will be confined to the power generation and industrial sectors.

Barclays examined North American gas and power trends, examining demand potential in several categories: liquefied natural gas (LNG) exports, replacement of coal-fired generation plants, natural gas use as a transportation fuel, new industrial facilities, and the use of gas in Canadian oil sands production.

Between 2015 and 2020 Barclays expects demand growth of about 11.3 Bcf/d cumulatively, which would equate to annual demand growth of about 2.26 Bcf/d. That level of growth is slightly less than the average supply growth rate of 2.51 Bcf/d over the past five years. "Barring a case where this demand surge catches the market in a period of weak supply growth, this chunk of demand should not result in a price shock," Barclays said.

In envisioning the "real demand response" to continuing low prices, Barclays sees the expansion of industrial growth and LNG exports as fueling a lot of the growth. Natural gas vehicles (NGV) and retirement of more coal-fired generation also will be sources of growth, according to Barclays.

As supply growth has continued to outpace increases in demand for gas, the electric generation sector is the only exception and there gas is simply taking market share away from coal. "Fully 10% of gas use in the United States in 2012 is displacing coal -- [and that is] demand that can swing back to coal if gas prices rise," Barclays said.

Industrial growth using gas as a feedstock in the petrochemicals and fertilizer sectors, along with increased use of gas in producing Canadian oil sands, will be factors, but the growth of gas use in the next few years will be "dwarfed" by increased gas supply, Barclays said.

By 2020, more robust demand is likely from LNG exports, said Barclays, which estimated that up to 4 Bcf/d of exports could eventually be realized. The estimates compare to more than 20 Bcf/d of export licenses currently being sought in the United States and Canada.

The demand growth projections for the other sectors add up to more than 7 Bcf/d -- coal plant replacement (1.54 Bcf/d); NGVs (2.1 Bcf/d); expanded industrial facilities (2.2 Bcf/d); and oil sands production (1.2 Bcf/d), Barclays estimates.

"The critical question is whether this demand will tighten gas markets, leading to higher prices," Barclays said. "When stacked one atop the other, the net demand growth is impressive, yet we do not think this demand spurt necessarily will lead to higher prices."

Aside from a scenario of the demand surge coming when supply growth unexpectedly faltered, the amount of demand projected can be met by expected supply growth, Barclays said. An exception to this could be if "demand growth coincided with producer consolidation or tight capital markets," the report said.

©Copyright 2012 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.