The stars are aligning for "much improved" natural gas prices next year and beyond, said First Energy Capital's Martin King, vice president for institutional research, and it's no time for complacent thinking.
Growing demand pull is likely to challenge the supply side of the market, and higher gas prices will be necessary to stimulate production, King said during a recent presentation. The Canadian market will see plenty of price volatility and could be facing permanently higher basis going forward.
"The U.S. could be looking at nearly 17 Bcf/d of supply expansion by 2018. Is this even possible? Not at the pathetic prices and growth rates being seen for 2013," King said. It's going to take supply growth of 3-5 Bcf/d per year. The last time this happened was in the late 1960s. Can it happen again?" Supply needs to start growing "aggressively" in the next 12-15 months, but so far the capital commitments for such growth have yet to show up, King said.
Exports of liquefied natural gas (LNG) from North America are becoming increasingly attractive as overseas LNG markets are looking tight until 2020, King said.
"We remain unapologetically price bullish," King said. "Despite pervading price bearish sentiment, we think it remains prudent (and correct) to look for much improved natural gas pricing in 2014 and beyond."
First Energy's forecast has the same theme as several forecasts that have popped up in recent days, as analysts appear to have taken off the blinkers and are looking beyond gas-fueled electric power growth to increased exports to Mexico and a torrent of new industrial demand revving up in the wings (see related stories).
U.S. natural gas demand is likely to take off between now and 2020, a Goldman Sachs economist said in a recent presentation, and the growth will be sustainable even at prices of $6.00/MMBtu. Credit Suisse analysts see industrial demand and Mexican exports tightening the supply/demand balance pushing toward higher prices. And the U.S. Energy Information Administration last week raised its forecast price for 2014 to $4.00 up from $3.71 this year.
Calgary-based First Energy's forecast calls for New York Mercantile Exchange gas prices of US$3.75/MMBtu this year, rising to $4.50 next year and $5.25 in 2015. The forecast drops to $5.00 in 2016 but climbs to $5.50 in 2017 and $5.75 in 2018. Gas at Aeco is seen at C$3.00/Mcf this year, rising to $3.79 next year and $4.46 in 2015. In 2016 the forecast drops to $4.20 but climbs to $4.70 in 2017 and $4.93 in 2018.
"There is a significant growing momentum of demands that are being placed on the U.S. natural gas market which will provide for a much tighter balance over the next few years (and is already starting to be felt)," King said. Gas use among power generators is expanding, and industrial demand is growing steadily, he said. Exports of gas to Mexico have been setting records and are continuing to climb, and then there's that "pending huge pull of gas for LNG export...The sum of these growing pulls will place an enormous and growing burden on U.S. domestic gas supplies."
In the power sector, First Energy foresees U.S. power generator gas demand growth of 0.9 Bcf/d next year, followed by annual growth of 2.1 Bcf/, 1.9 Bcf/d, 2 Bcf/d and 1.3 Bcf/d. And these figures are likely to be revised upward as 2014 gets under way, King said. "Our outlook is conservative versus what could happen under coal replacement and factoring in all the new-build gas generation. New-builds could add another 3-4 Bcf/d to demand."
Recently, industrial demand has been beating most forecasts, King said. First Energy said most industrial activity can take prices up to US$5.50/MMBtu. The firm's forecast calls for industrial demand growth of 0.1 Bcf/d next year, followed by annual increases of 0.2 Bcf/d for the years 2015 through 2018. "There are plenty of [industrial] brownfield and greenfield projects coming to the market that could increase this outlook," King said.
Pipeline gas exports to Mexico are a growing demand driver. First Energy forecasts that U.S. net gas exports to Mexico will climb from 1.9 Bcf/d this year to 2.4 Bcf/d, 2.7 Bcf/d, 3 Bcf/d, 3.5 Bcf/d and then 3.9 Bcf/d in 2018. And they could go higher, easily up to 5 Bcf/d or more if additional pipeline projects beyond those already approved are completed by the end of 2018, King said. "...Mexico is becoming a huge driver of the U.S. market." As for U.S. LNG exports, First Energy is forecasting that they begin in late 2015-early 2016 and climb to about 4.5 Bcf/d in 2018.
First Energy is factoring in more than 2 Bcf/d of Marcellus Shale production expansion into next year, similar to U.S. energy analysts (see related story; NGI, Sept 30). "It's already in the queue waiting on pipe," King said. "Shales will provide the backbone for any future supply expansion, but the growth has to start coming from more than just one source."
Turning to Canada, King was not shy about allowing that "Canada has become increasingly marginalized in terms of supplying the U.S. market." Recent toll changes on TransCanda's Mainline mean higher shipping costs to move gas to points outside of Alberta to the east (see NGI, Sept. 16). "The end result is the likelihood of higher basis going forward," King said. Despite the challenges, Canada could benefit if the United States struggles to meet the demand First Energy is forecasting. "...Canada's role has stabilized for now; real upside exists if the U.S. cannot meet the coming supply mandate."