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 Ample reserves have depressed prices since 2008, but sudden surges
in consumption could jolt the market as early as 2015 when new
exports coincide with higher domestic demand and lagging production
for the fuel championed by President Barack Obama in his State of
the Union speech on Tuesday.
Signs of strain have already emerged. The coldest winter in decades
pushed prices for natural gas, which is used to heat homes and
produce electricity, to four year highs and exposed inadequacies in
the pipeline network. Some prices in the poorly supplied northeast
of the country rose to all-time highs above $120 per million British
thermal units on January 21, more than $100 higher than the previous
week.
"As demand comes, we are sitting here fat, dumb and happy," said
Vikas Dwivedi, an energy market strategist at Macquarie Group. "But
you need a price signal ahead of time to stimulate the production
growth."
Dwivedi predicts a first period of high prices to last for up to 6
months in 2016 and be followed by continual unpredicted surges as
new projects demanding natural gas come online.
The current price spike and any future volatility will not alter the
decades' worth of supply — thanks to new techniques such as fracking
to release oil and gas from shale deposits — so the long-term
outlook should remain the same.
Exports of natural gas to Mexico are expected to double in the next
two years, just as companies begin shipping liquefied natural gas
from new export projects to Europe and Asia. At the same time, more
gas will be used at home in industry and electricity generation as
coal plants retire.
In all, U.S. demand for gas, including domestic use and exports,
could rise by 15 percent by 2018, according to Reuters estimates.
Meanwhile, after a 20 percent growth in supply because of booming
shale drilling since 2007, production increases are expected to slow
to only 2.1 percent in 2014 and 1.3 percent in 2015.
BRIDGE FUEL
In the State of the Union address, Obama called for more trucks to
switch to natural gas and the creation of more jobs in the sector.
He described natural gas as "the bridge fuel that can power our
economy," on the way to a less carbon-intensive future.
But the big supplies have pushed down prices of contracts for
delivery this year and in the future, dampening investment in
pipelines and drilling, despite potential demand rises in the coming
years. Prices for delivery in 2018 are lower than today, according
to Reuters data.
The largest contributor to demand will be exports of liquefied
natural gas (LNG). Spurred by the low cost of American natural gas
compared with European and Asian supplies, more than a dozen
companies have submitted proposals to build export plants.
The government, wary that exports will push domestic prices higher,
has not said how many projects will be approved. But the four
projects allowed so far have the capacity to export 7.1 billion
cubic feet (bcfd) of natural gas by 2018, more than 10 percent of
today's daily 70 bcfd supply.
Even though it is difficult to assess how many projects will be
built — local permitting can be contentious, construction takes up
to five years, and only one of the four approved projects is being
built — LNG developers are signing deals with potential buyers
across the globe. These deals depend on U.S. construction and export
permits.
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"U.S. natural gas prices have not yet priced a rise in demand
because there are too many unknowns at this point. One unknown is
the demand for LNG itself," said Abhishek Kumar, an energy and
modeling analyst at Interfax Energy's Global Gas Analytics in
London.
Indeed, export plans are risky and could come under threat if prices
rise high enough for exports to not be viable for European and Asian
buyers.
At the same time, U.S. exports of natural gas to Mexico are expected
to rise by 3.5 bcfd by the end of 2014, nearly doubling from their
current rate, according to the U.S. Energy Information
Administration.
Coal plants retiring between now and 2018 to make room for cleaner
fuels will be replaced by gas-generated power plants requiring 1.9
bcfd, according to the Thomson Reuters North America Natural Gas
Research Team.
Though suppliers could ramp up production to meet new demand, they
will be delayed if the required infrastructure is not built ahead of
time or wells are not ready to flow gas.
Pipeline constraints like those seen between Marcellus shale fields
centered in Pennsylvania and New England customers can cause a
bottle neck during high demand periods, as evidenced during the
arctic cold snap that led to record high prices in the region.
The number of rigs drilling for natural gas has fallen dramatically
over the last two years as companies target more lucrative oil. In
2013, the rig count reached 349, its lowest number since 1995. In
2011, the rig count was near 1,000. Some analysts did note that rigs
in use today are more efficient and therefore fewer are needed.
Producers currently have an incentive to taper back production to
prevent flooding the market and driving down prices, but analysts
fear the infrastructure such as pipelines may not be ready when
demand peaks.
When it comes to predicting demand, much remains unknown. Should
natural gas prices rise far enough to lose their competitive edge,
potential customers may cut back. Aaron Calder, a market analyst at
Gelber & Associates, said utilities who have switched from coal to
natural gas may think differently should prices rise.
"Who pays for the very last molecule of gas sets the market, and
that's power generators. We would see utilities hit the breaks on
natural gas power generation if prices got too high," said Calder.
(Editing by Edward McAllister, Peter
Henderson and Grant McCool)
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