North America’s natural gas prices, now at their lowest level in 10 years, may not be helping explorers, but positive impacts are being felt across a variety of industries inside and outside the energy sector, according to an analysis by Moody’s Investors Service.
Analysts Steven Wood and William L. Hess noted that Moody’s last published a special comment about the impact on other industries in April 2010 when spot prices “hovered uneasily around $4/MMBtu” (see NGI, April 5, 2010). Gas producers today “would be pleased with such prices…Gas prices in the $2-3/MMBtu range have not been typical since early 2002. We see little room for growth in natural gas pries until 2013 at the very earliest.”
Moody’s in late January cut its North American gas price assumptions through 2013 and said it assumes that gas delivered at the Henry Hub this year would sell on average for $2.75/MMBtu (see NGI, Jan. 30).
The duo took a look beyond the gas industry itself to assess which sectors would experience more pressure from low gas prices through 2013, which sectors would benefit, and which sectors would see minimal impact.
Commodity chemical manufacturers, as well as ethylene producers are coming out ahead on low gas prices and are enjoying the “distinct” cost advantage over competitors in Europe and Asia, said the analysts. Likewise, low gas prices have reduced input costs for a plethora of manufacturers that include Corning, Goodyear Tire and Rubber, Precision Castparts and Illinois Tool Works.
North American chemical companies generally are benefiting, with those using gas as a feedstock, particularly manufacturers of ammonia and methanol/acetic acid, gaining the most. Ethylene producers use the most ethane as a percentage of capacity, said the duo.
If gas prices remain low for a significant period, some North American manufacturers are expected to see improved operating margins as input costs decline. Low gas costs also may affect the cost competitiveness of different packaging materials, including glass and plastic.
Many unregulated utilities and power producers have been able to take advantage, in particular, those that own gas pipelines near unconventional gas resources, including Dominion Resources and NiSource. On Wednesday the midstream services unit of NiSource Gas Transmission and Storage said it would construct a 90-mile large-diameter gathering system using Columbia Gas Transmission’s existing right of way through several Ohio counties in the Utica Shale.
Some regulated utilities and gas pipelines also stand to benefit because lower gas costs “make it easier for utilities to pass through higher rates for their base services, without a political backlash,” said the Moody’s analysts.
Low gas prices, however, have had a mixed effect for other entities. For instance, diversified operations with unregulated gas marketing businesses have been negatively impacted because the gas glut “has erased the arbitrage opportunities that used to exist from geographic and seasonal basis differentials.”
According to Moody’s research, unregulated power producers more weighted to coal-fired generation also may use a “hunker-down” strategy to conserve capital and liquidity in waiting out higher prices. Most “have good cash reserves and undrawn credit facilities,” but “current market conditions might outlast liquidity.”
Coal-fired generators could see “significant margin pressure as natural gas prices lead to sustained fuel switching from coal,” said the analysts. Several big coal companies, they noted, already have announced production cutbacks.
In addition, interstate pipeline may experience a “mild down-cycle” over the next few years while they adjust to shale gas supplies and “competitive dynamics” from new pipelines.
“Arbitrage opportunities have dissipated as basis differential share narrowed and prices [are] less volatile,” said the analysts. Fewer opportunities meant reduced demand for some market-driven services like park-and-loan and gas storage.
Meanwhile, cheap gas in Canada has boosted the oilsands industry’s operating margins and project economics, and positively impacted in-situ, steam-assisted gravity drainage production because input costs have fallen.
However, the finances of Canada’s gas-producing provinces, particularly Alberta, haven’t fared as well. Alberta’s gas royalties dropped by about 3.6% (C$1.4 billion) from March 2010 to March 2011 and declined by about 8% from 2009 to 2010, according to Moody’s research. Low prices should continue to weigh on conventional gas drilling in Alberta, said the analysts. British Columbia, Saskatchewan and Nova Scotia “derive less of their revenue from natural gas” but persistently low gas royalties over the next few years would not help these provinces balance their budgets.
Beyond Canada, prolonged low prices may limit growth as well in Trinidad and Tobago’s upstream sectors and “eventually pose a supply risk” for the liquefied natural gas, gas transportation, and processing and petrochemical sectors.”
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