Fitch Ratings on Friday joined a growing list of energy pundits in predicting no letup in North American natural gas production in 2012, low prices or not.

Fitch’s Sean T. Sexton, Mark C. Sadeghian and Daniel P. Harris compiled North American oil and gas data for their 2012 forecast and issued a “stable” outlook overall for the North American oil and gas industry in the coming year. Liquids production is likely to increase because of robust oil prices, and gas output isn’t expected to slow because of the “explosion” from shale plays.

“Despite persistently low natural gas prices, natural gas production is expected to continue to increase due to the explosion in shale gas production from new plays spread across the U.S. and Canada,” wrote the trio. “The growth in supply relative to tepid domestic demand growth is the main driving force for the weakness in prices.”

North American gas prices are forecast to be weak in 2012 and “perhaps hit multi-year lows as ongoing increases in supplies of lower cost shale-based natural gas continue to outpace the growth in domestic demand for that fuel.”

Earlier this month the Energy Information Administration said Henry Hub spot prices, which are expected to average $4.02/MMBtu in 2011 — 37 cents/MMBtu lower than last year — will continue to decline, averaging just $3.70/MMBtu in 2012, which is 43 cents lower than a forecast in November (see Daily GPI, Dec. 7; Nov. 9). Moody’s Investors Service this month lowered its assumptions for North American gas prices for the next two years (see Daily GPI, Dec. 12). Raymond James & Associates Inc. also cut its 2012 gas price forecast to $3.50/Mcf (see Daily GPI, Dec. 6).

Domestic demand growth for gas should be higher because of growth in the industrial and power generation sectors, but demand may be at lower levels than in prior years, said the Fitch analysts.

“A longer-term issue for the industry is generating adequate demand growth to match increased supply going forward. Possible options include liquefied natural gas (LNG) exports [see related story] from North America and increased use of natural gas as transport fuel. Neither option is likely to change market dynamics in the near term.”

The shale gas revolution has changed the game in the North American onshore and “accordingly, in the price of natural gas for the foreseeable future,” they said. “The difference in the strength between the crude oil market and natural gas market is twofold: the robust supply relative to demand in natural gas in North America, and the fact that the natural gas market in North America is regional, due to the inability to transport gas globally from the U.S. and Canada.”

According to Fitch, the growth in U.S. dry gas production since 2006 has been about 21.5%, versus a growth rate in consumption of 11.5% over the same period. That jump in output has stifled LNG imports to the United States as well as imports from Canada.

“Production of natural gas in the U.S. now exceeds the levels of the early 1970s, and the U.S. is now nearly self-sufficient in its consumption of this commodity. These two facts are the significant differences from crude oil in the U.S.”

The North American gas market also is regional and “there is currently no way to export significant volumes of supply abroad,” so “prices are expected to be suppressed beyond 2012 due to supply exceeding demand.”

The Fitch team isn’t optimistic in the “near to intermediate term” for LNG exports or big gains in natural gas transportation.

“For LNG exports to occur, huge investments are required for liquefaction trains and export facilities. These investments require significant risk assumptions that include construction cost escalations, the existence of long-term LNG premiums in the Far East and European markets shrinking significantly in the latter part of this decade due to oil prices decreasing markedly or an abundance of LNG supply available relative to demand.”

In addition, Sexton and his colleagues said the shale revolution in North America could occur in Europe and Asia as well, which would lessen demand for LNG imports.

And for gas to gain a foothold in the U.S. transportation market will require a lot of money “for both compressed natural gas fueling stations and a conversion of some existing vehicles to start using these stations,” said the analysts. “This investment would have to be heavily subsidized as it is not presently economical for the investment to occur even with crude oil and refined products currently trading at steep premiums to natural gas on a Btu-equivalent basis.”

Meanwhile, crude oil prices in the short term “could remain well above its long-term base case price deck of $65/bbl partially due to extremely loose monetary policies by the U.S. Federal Reserve. Fitch notes, however, that the single biggest threat to the crude oil market remains a decrease in overall global demand, due to the risks of potential recession in the U.S. and/or Europe and a decline in China’s economy.”

Even with high oil prices and a big backlog of projects, Fitch’s outlook for the North American drilling and oilfield services industry is negative for 2012 because analysts expect continued high capital spending will limit near-term free cash flow generation.

“Dislocations” in the Brent-West Texas Intermediate crude oil spread, which dominated 2011 refiner results, would “continue to be important” in the coming year “but should decline in size as the resolution of capacity takeaway issues out of the Midcontinent eases the bottleneck at Cushing, OK.

“As a result, traditional drivers of refining profitability should gain in importance, including wider light-heavy spreads, higher clean product yields (especially distillates), and cheap natural gas.”

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