Natural gas prices have been due for a shot in the arm, and they’re going to get one, actually more than one. But producers will have to wait until the impact of drilling declines is felt, lifting gas to $4.00/MMBtu, and then until power generation load growth gains traction and lifts prices to $5.00/MMBtu after 2015, according to consultant ICF International.
Gas will average about $4.00/MMBtu through 2015, said ICF’s Kevin Petak, vice president of gas market modeling, during a webinar Tuesday. Firming from today’s prices will come from output declines in dry gas plays as producers have rationalized production. But it will take demand growth to get the market to the next level.
“Electric load growth is key to gas demand. That’s where we think a big part of the gas market growth is going to come from,” Petak said. “We project that electric load is going to grow at 1.2% per year. That’s consistent with our economic growth assumptions going forward where we see U.S. GDP [gross domestic product] growing at about 2.6% per year.”
Petak said “big chunks” of gas demand coming into the market during 2015-2016, particularly from power generation demand growth related to coal plant retirements, will lift prices to $5/MMBtu.
“…[W]e see $5 going out to about 2030 until we get a second price surge where prices firm on up to the $6.00/MMBtu ballpark, and that’s nuclear plant retirements that’s causing that long-term price run-up,” he said. “Basically, we see that a lot of the nuclear plants, or all of the nuclear plants, in the U.S. will end up retiring at the end of their 60-year life, and it’s about the 2030 period where that’s triggered; that’s where a lot of the plants reach their 60-year life. And in fact we see 10-20 gigawatts of retirement occurring between 2030 and 2035.”
The power generation sector is key, but other areas for demand growth are exports of liquefied natural gas (LNG), development of gas-to-liquids (GTL) facilities on the Gulf Coast, and industrial demand in general, for instance for incremental increases in ammonia production.
“In our base case projection, we project 4 Bcf/d of LNG exports from the U.S., 2 Bcf/d of LNG exports from Western Canada, and we project that there will be two new GTL facilities built along the Gulf Coast,” Petak said. “These are fairly large facilities; they will produce between the two of them 150,000 b/d of diesel products. And they are fairly substantial gas users. Each facility will use roughly 1 Bcf/d-plus of natural gas to produce the diesel. These are very large sources of demand that we could see on the horizon.”
From now until early next year the ICF price forecast trends a little more bullish than the New York Mercantile Exchange forward curve. However, after next January the two are largely in step through at least the middle of 2015, Petak said.
For now, though, low gas and natural gas liquids (NGL) prices will likely make for an aggressive mergers and acquisitions (M&A) market in the gas patch and the midstream sector as substantial infrastructure development is under way and planned for the years ahead, Petak said.
“We see that 2013 could be a pretty aggressive year for M&A activity, and we also see that the international companies are on the move in this environment,” he said. “There are companies, particularly Asian companies, that are looking to come into North America and acquire hydrocarbon assets and midstream assets from those companies involved in this whole shale resource boom.”
On the supply side of the equation, shale gas production is projected by ICF to grow from 75-80 Bcf/d in the United States and Canada today to 110-115 Bcf/d by 2035.
“The Marcellus [Shale] becomes a giant here,” Petak said. “It has roughly 20 Bcf/d of production by the time we get out to 2035; that accounts for about 15-20% of the total production in the U.S. and Canada.”
Other “nontrivial” areas are the Eagle Ford and Bakken shales, as well as the Niobrara formation, he said. The old mostly dry gas trio of Barnett, Haynesville and Fayetteville will “continue to chug along” too and enjoy a bit of a boost from higher gas prices.
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