The Future of Natural Gas, Part I

On Thursday morning, I’ll be delivering my major address on the future of natural gas. The occasion is a high-powered meeting hosted by Dominion Transport at the beautiful Nemacolin Woodlands Resort in western Pennsylvania.

Attending will be more than 100 leading CEOs and other executives from principal gas production, transmission, distribution, and end using companies.

My keynote presentation is entitled “Natural Gas Moving Forward: LNG, Hubs, and Pricing Prospects.” And in it I address where liquid natural gas (LNG) prices have been… where they are now… and where they’re going.

I thought I would share the first part of my presentation with you in today’s Oil & Energy Investor. The second part will appear on Thursday.

Here’s what I’m going to tell my audience… the straight story on what’s happening in the LNG sector…

A Brave New World?

Ten years ago next month I was sitting in a meeting of analysts, practitioners, and energy sages discussing the condition of the U.S. natural gas market. We all agreed that by 2020 the country would be importing at least 15% of the gas used daily.

That turned out to be quite a “B.S.” read – “before shale,” that is.

Well, these days we are at another juncture. And this one is going to propel us into quite a different market. I want to sketch out for you what I have been experiencing in the world market, the import of discussions around the globe, and the impact on things closer to home.

“Brave New World” is going to be an understatement.

But first, let me outline the current domestic energy situation…

The State of the U.S. Natural Gas Market

Natural gas inventory at the end of July came in 23% higher year-on-year (after two months of declines). That figure is estimated to reach 3.867 trillion cubic feet (tcf) by the end of October (and the end of the summer refill season) – 69 billion cubic feet (bcf) above the five-year average and the second highest on record.

2015 demand should end up at 76.5 bcf per day (bcf/d), or 27.9 tcf for the entire year. This is up 4.08% from 2014.

Gas marketed production is expected to grow by an annual rate of 5.4% in 2015, to 78.72 bcf/d, and to rise 2.3% in 2016, to 80.52 bcf/d. That puts it at an estimated total of 28.7 tcf for 2015.

According to the August 14 figures from Baker Hughes, the natural gas rig count stands at 211, 52% down year-on-year and 87% down from the high-water mark of 1,606 in September 2008.

Of course, increasing efficiency in drilling and well services has been improving per well production while lowering costs. However, primary production from unconventional tight and shale plays are still coming in with primary production in the first 18 months or so while market considerations continue to be put a restraint on rework and refracking options.

That is because of the price. The 2015 spot price should come in at an average of less than $3 per 1,000 cubic feet; below $4 in 2016 (my read is $3.25 by the end of second quarter 2016; $3.75 by end of year).

Nonetheless, there are some significant changes under way.

The Increasing Role of Natural Gas in Power Production

In addition to the traditional residential and commercial use of natural gas for heating purposes, there are five other expanding outlets for gas usage.

First, the most visible has been in the generation of electricity. Coal’s power production share should be about 35.6% in 2015, down from 38.7% in 2014. Natural gas will come in at 31.2% for 2015, up from 27.4% in 2014.

Renewables will provide about 7% in 2015. But over half of new generating capacity coming on line this year is powered by renewables 55%, with almost all of the remainder (44%) using natural gas as the primary fuel.

Here’s where it gets interesting. We are expected to replace 90 gigawatts of power production by 2020, all aging coal-fueled plants. As much as another 30 gigawatts would be impacted by EPA non-carbon limits (mercury, nitrous, and sulfurous oxide emission standards).

I initially estimated that each 10 gigawatts moved to natural gas would require 1 bcf/d more in supply. It is now coming in at closer to 1.2 bcf/d, with the transition showing a quicker upfront movement than I had initially anticipated. The slowdown over the past year, therefore, is simply a reflection of a higher front loaded movement.

The bottom line is this. If only 75% of the replacement fuel sourcing moves to natural gas (and that would be giving renewables a decidedly  bigger slice than anticipated), we require almost three times the current surplus inventory just for power generation, and even then for electricity that remains at today’s levels.

Other Sectors Switching to Natural Gas

Second, industrial usage is increasing again, with annual increases above 3% estimated for both 2015 and 2016.

Third, the move to LNG (liquefied natural gas) and CNG (compressed natural gas) for high-end truck traffic is just about completed in Canada and is moving forward in the U.S. Transition of lighter truck traffic and a bridge to passenger vehicles will take longer, but municipal and bus usage has picked up with natural gas-powered and hybrid vehicles becoming emphasized (or in some cases mandated) for taxi fleets in several cities.

Fourth, and of greater impact, is the transition to natural gas and away from oil as feeder stock for petrochemicals. This makes the competition for new cracker facilities such a focal issue. There are seven major projects under consideration at the moment, with some smaller satellite units also possible. Of the main sites, three facilities are likely to be approved. Beaver County in western Pennsylvania should be one of the three, with the other two probably on the Gulf Coast.

This element alone will have a major impact both upstream and downstream, with the Marcellus occupying a main location for a broader gas footprint.

However, it is the fifth that comprises the most significant game changer we are going to be witnessing in our lifetimes. This refers to the massive transformation unfolding in the global LNG market.

I’ll tell you all about it in Thursday’s Oil & Energy Investor.

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