As most now recognise, growth in shale production has been profound over the last few years, increasing 900% from around 2 billion ft3/d in 2005 to 20 billion ft3/d in 2011. In doing so, it has transformed the North American gas market. In this article, Navigant provides a snapshot of how it sees the natural gas market unfolding over the long-term to 2035.
The US will head into a period of more stabilised natural gas prices over the long-term for many reasons, including the anticipated growth of natural gas demand from a number of different industries including the industrial, LNG export, and electric generation sectors. Over time, increased demand in these sectors will support a balanced supply and demand structure that will provide a market exhibiting long-term market sustainability without the risk of price shock.
The new natural gas industry
As the supply profile of shale gas continues to increase as a share of total supply, Navigant sees the natural gas industry developing into something very different than in the past. In the new natural gas industry, exploration becomes less of a factor as exploitation and production related activities become the key activities of the producing industry. As a result of the key technological breakthrough of hydraulic-fracturing through horizontal drilling, production related activities have transformed the industry. Furthermore, the market is not expected to revert back to its previous key fundamental structure by which exploration and the risks associated with it drove much of the volatility in the market. In many ways, the new natural gas industry is about better managing North American natural gas resources with an increased capability to achieve balance between supply and demand.
Navigant sees three key areas of demand growth: industrial demand recovery in the near-term, the emergence of North American LNG exports in the mid-term, and stable and moderate growth in the gas-fired generation sector in the long-term.
In the near-term and early part of the mid-term, low natural gas prices in the industrial sector will pull natural gas demand and present an opportunity for gas market growth.
Currently, there is a great deal of overseas interest in the US on behalf of large industrial gas users, but these same companies have some apprehension about how long natural gas prices will remain at current low levels. The key question for the industrial market is whether the timing of LNG export projects will coincide with greenfield industrial facilities such that natural gas prices in North America will approach the same higher price levels in other countries. The answer Navigant has come to is that the size of the US natural gas resource appears to be very large and getting larger, yet still the resource is in the very early stages of development, with much more to be learned regarding the geology and geoscience of today’s ‘new natural gas industry’. Through increased understanding of the resource over time, it is only logical that this domestic resource will develop as an increasingly core energy resource for North America over the long run. Additionally, with a well-developed market structure to support and continue to provide new infrastructure as required, the company sees the North American market being able to serve both the domestic industrial and global LNG export markets at price levels that are attractive and that balance the needs of both producers and buyers alike.
Regarding North American LNG exports, Navigant predicts a total potential of 6.8 billion ft3/d (US export levels of up to 4.8 billion ft3/d by 2020, and Canadian export levels reaching 2 billion ft3/d by 2019).
A number of factors have contributed to this view, including difficult regulatory processes, uncertainty surrounding US financial and commercial issues relating to large infrastructure facilities, and global market considerations including supply competition. Currently, many in the industry are following the developments, of the US Department of Energy (DOE) as it reviews applications from 15 different companies that have filed for export licenses that would ship 23.71 billion ft3/d of LNG to countries with no existing free-trade agreement (non-FTA) with the US.
Aside from US domestic regulatory uncertainty, there are also a number of other factors that Navigant believes will ultimately limit the number of facilities built in the US. These include the substantial capital requirements, commercial contractual issues, global competition from existing LNG exporters such as Qatar and Australia, and competition from the potential development of global world shale resources.
Regardless of the volume of exports ultimately approved by the DOE, the global market needs will determine the actual level of US exports and capacity that is built. Navigant views the outlook for global LNG as strong, particularly in the Asia-Pacific markets, where a gap between supply and demand is forecast to reach 37.3 billion ft3/d by 2030. The company believes North America is well-positioned to capture a portion of this market.
The largest growth in natural gas demand in North America is expected to come from the natural gas-fired electricity generation sector over the longer term. In recent years, natural gas-fired generation has seen strong growth as a result of coal retirements and favourable natural gas prices. In the near-term, growth from these sectors is expected to remain strong, but will become more moderate in the longer term due to the eventual slowing in retirements of coal-fired plants.
As indicated in the North American Natural Gas Market Outlook, Fall 2012, growth in gas-fired generation over the longer term will be primarily driven by environmental regulation of coal plants and state renewable portfolio standard (RPS) mandates.
Another source of growth in natural gas demand will come from the state enacted RPS mandates. The District of Columbia plus 29 states and two US territories have created such mandates in favour of renewables increasingly making up a growing share of the electric generation mix. Another eight states and two other US territories have adopted renewable portfolio goals. These goals and mandates will require a higher level of electricity generation to come from renewable resources in the coming years. While a majority of the additional generation will come from wind and solar power, both are intermittent resources that require additional generation options for load balancing and grid reliability. Most of the additional generation is likely to come from peaking natural gas plants that can be quickly ramped-up and down in order to balance the intermittent output from renewable resources.
Where is the gas going to go?
In closing, the key question is where is all this abundant gas going to go? As Navigant sees it, the growing natural gas supply will end up in three key natural gas demand areas:
- Into a revitalised industrial sector.
- Into the new North American LNG exports market that is in development, although first deliveries will not be until after 2017.
- To meet the increasing natural gas-fired generation needs as a result of growth in the demand for power but also as a result of continuing coal-to-gas switching.
These three demand areas will primarily support North America’s large conventional and unconventional resource base that, in the end, will serve to stabilise natural gas prices over the long-term. Navigant allows that regional differences to stable gas prices are also set to exist for periods of time, especially in those areas where new infrastructure is most required. In these regional areas, significant price volatility could occur on a localised basis that in turn could create challenges in parts of the country. In sight of these regional areas where prices will still be unstable, Navigant’s long-term view is valuable but still only a starting point to begin to answer the significant questions as to how the North American natural gas market will evolve in the future.
For more information on Navigant’s ‘North American Natural Gas Outlook, Fall 2012’, please click here
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