U.S. natural gas prices are set to rise beyond current market expectations, climbing by about 50% between 2011 and 2020, or 4% per year, to surpass $8/MMBtu, according to a new report by the Deloitte Center for Energy Solutions.

“Navigating a Fractured Future: Insights Into the Future of the North American Natural Gas Market,” used the consultant’s world gas model, which analyzed gas markets over the next 20 years. Under the reference scenario, researchers assumed that continued economic recovery from the recent recession would spur steady growth in gas demand in North America, as well as worldwide, especially in emerging economies such as China and India.

Projected world demand for natural gas was found to grow at a yearly rate of 1.9% through 2030, with Asia and the Middle East showing the fastest growth, more than 3%/year. Under the model, U.S. gas prices would escalate in real terms, reflecting demand growth, the rising cost of finding and developing gas resources, as well as the projected future costs of pipeline and liquefied natural gas (LNG) imports.

U.S. demand for gas-fired power generation would not lift gas prices to the peak seen several years ago. The gains will come from increased cost savings implemented by new technology, said the report.

With increased production from shale gas and the availability of other supplies, “production costs will play an increasingly critical role in determining the value of individual gas resources.”

Deloitte’s modeling scenarios also determined that North American basis differentials would diverge from historical relationships as new supply basins grow in prominence.

“Prices in different regions are projected to grow at different rates, altering pipeline flows and capacity values,” said the authors. “The biggest change takes place in the eastern U.S., where increased production from the Marcellus Shale is expected to displace supplies from the Gulf and other regions — a displacement that is projected to reverse some regional pipeline flows.”

The Marcellus Shale already is wreaking havoc with traditional basis on some pipelines, including El Paso Corp.’s Tennessee Gas Pipeline, according to a recent study by NGI (see Daily GPI, Sept. 7).

Deloitte’s modeling found that going forward, producers operating in the western states may experience “rapidly rising supply costs” because of the absence of significant shale gas resources, strong competition from other market regions for available supplies and a regulatory environment that would discourage LNG imports.

“As a result, prices are projected to escalate rapidly, which would leave California with some of the highest prices in North America,” the Deloitte researchers said.

For midstream operators and investors, the basis shifts “carry strong implications for the direction of flow and the value of existing and future pipeline capacity.”

Deloitte’s reference scenario assumed current market trajectories without any major regulatory intervention. Worldwide economic growth is expected to rebound “fairly quickly from the recent downturn and resumes steady growth,” under the scenario.

“World gas demand grows by 1.9% per annum through 2030. It assumes no U.S. regulatory policy restricting emissions of carbon dioxide, although there is tightening of mercury, nitrogen oxides and sulfur oxides regulations.” However, even without carbon legislation, gas demand for power generation is expected to jump as gas becomes the fuel of choice for new domestic power plants.

The scenario also assumes no new regulations or restrictions on hydraulic fracturing processes to produce shale gas. This scenario did not include the potential impacts from the announced shutdown of nuclear power plants in the aftermath of the Japanese nuclear disaster in March 2011.”

Two alternative scenarios are presented, one that alters demand and the other that alters supply. The “grand slam for gas” demand scenario is roughly based on the high demand case described by the International Energy Agency’s World Energy Outlook 2011 (see Daily GPI, June 7).

“Under this scenario, global demand rapidly escalates as Asian demand, primarily from China, continues to grow at a rapid rate,” the authors said. “Gas demand in China is projected to equal all of European gas demand by 2035. Furthermore, some leading nuclear power countries, including Japan, Germany, and the U.S., are assumed to shut down or scale back their nuclear energy production or expansion plans, leading to increased demand for natural gas.”

The supply scenario, “lower shale costs,” assumes that large volumes of shale gas will be produced that require a wellhead price of more than $8/MMBtu to make production economically viable. However, the researchers projected that production costs would be dramatically lower — by as much as 50%.

Deloitte’s projections of Henry Hub prices rise above current levels under all three scenarios. “In an absolute sense, relative to the reference scenario, the price impact of the lower shale gas cost scenario is much greater than the impact of the higher gas demand scenario.”

Interestingly, in what may run counter to conventional wisdom, Deloitte’s modeling found that U.S. imports of LNG would increase over time “although filling existing LNG import capacity is highly unlikely” for several years.

Exporting LNG from North America to Asia and Europe may be tempting now, but it may not prove to be profitable over the long term, “especially if future technological advancements do not continue to significantly drive down the cost of producing shale gas,” said the researchers.

“The large current spread between depressed domestic prices and relatively high prices abroad has motivated some to analyze whether they should invest in liquefaction facilities to export LNG from the United States,” the authors said. “However, it is anticipated that projected new supplies and pipelines over the next few decades will apply competitive pressures on Asian and European markets.” Meanwhile, “firming U.S. prices would narrow the spread with Europe and Asia.”

Based on Deloitte’s modeling, global LNG production will nearly double between 2010 and 2030, which would make more gas available to the United States once higher priced foreign markets are satisfied.

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