{"id":921,"date":"2013-12-09T16:49:36","date_gmt":"2013-12-09T22:49:36","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=921"},"modified":"2014-02-04T10:24:19","modified_gmt":"2014-02-04T16:24:19","slug":"us-natural-gas-demand-outlook-2","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2013\/12\/09\/us-natural-gas-demand-outlook-2\/","title":{"rendered":"US Natural Gas Demand Outlook"},"content":{"rendered":"

Natural gas demand outlook is probably more uncertain than the\u00a0production side of natural gas<\/a>.\u00a0\u00a0 The natural gas production is limited on the upside by the technology capability and infrastructure.\u00a0 To the production downside, there is some political constraints.\u00a0\u00a0 However, the variability for natural gas demand is likely more uncertain as the upside could be quite high with exports, revitalization of the US manufacturing base, and the power sector increases.\u00a0\u00a0 All of these variables involve the economy and the political willingness to act.<\/p>\n

Whenever one starts with fundamental analysis, it is always good to take a trip down memory lane.\u00a0\u00a0 Of recent, the largest impact to demand occurred in the winter of 2011-2012.\u00a0 Examining the winter residential demand, the volume has been at its lowest \u00a0since the winter of 1986-1987.\u00a0\u00a0 This was a drop of 3.2 BCF\/D compared to the 5 year average.\u00a0 The significance of this mild winter is comparable to the supply disruption that occurred from Katrina in 2005.\u00a0\u00a0 Therefore, it is very important to put that into context that the 2011-2012 was the once in one hundred year winter.\u00a0\u00a0 The impact of such event should and has been felt for multiple years similar to the Katrina impact.\u00a0\u00a0 The timing of the winter with the coincided shale gas production has led us to observe low gas prices over the last two years.\u00a0 I would contend without this winter impact, we likely might not have observed the prices below $3\/mmbtu.\u00a0 The Katrina impact took about 18 months for the market to come back to fundamental balance.\u00a0\u00a0 The disruption of 2011-2012 winter should be done by this year.\u00a0\u00a0 The remaining bearish impacts will be directly with a function of shale gas production.<\/p>\n

Another demand for natural gas which cannot be avoided, given it now represents the largest demand sector for natural gas, the power sector.\u00a0\u00a0 A historical phenomenon for natural gas demand was the rise of natural gas demand in the power sector which occured with one of the largest price rise.\u00a0\u00a0 From 2002 to 2008, we observed a 15% annualized growth of natural prices while demand in the power sector grew nearly 4% on annualized basis.\u00a0\u00a0 Most people outside the energy space do not realize this.\u00a0\u00a0 The reason this happened was the incremental load growth had to be met and the spare capacity in the markets came from the over build out of gas units in the later 90\u2019s and early 2000\u2019s.\u00a0\u00a0 Load growth was averaging 1.2% from 1998-2008.\u00a0 The rising price of natural gas demand would not stop gas being used in the power sector.\u00a0\u00a0 Therefore the load growth was expected to add around 1 Bcf\/d of gas demand each year.\u00a0\u00a0 This also played a crucial part in natural gas price collapse.\u00a0\u00a0 As load growth has been stymied since the 2008 financial collapse.\u00a0\u00a0 Three areas are driving the lack of growth one economic, the other, the push on energy efficiencies initiatives and the huge renewable development.\u00a0\u00a0 Renewable growth is likely to slow down, now that gas prices are putting damper on renewable economics.\u00a0\u00a0 Energy efficiencies still have room to alter the demand landscape, but the big unknown is the economic recovery.<\/p>\n

As noted in the\u00a0previous report on the challenges in the power sector<\/a>, the growth is far from the trend line.\u00a0\u00a0 Will there be a reversion to the mean trend line?\u00a0\u00a0 Will low natural gas price stimulate not just natural gas demand for the raw material but will it generate electrical demand from a manufacture revival? \u00a0For the base case, I have decided to take a conservative approach to revert demand back to the trend line as if it was going to get reset.\u00a0 In addition, due to the $9 billion energy efficiency market, I have trimmed load growth by 0.5% similar to the EIA load forecast of 0.58%.\u00a0 Counterbalancing the load reduction is the increase retirements.\u00a0 Without load growth much of the old units\u00a0whether coal or other types of unit cannot afford their fixed cost to operate.\u00a0 Therefore we still see\u00a0incremental power demand will add 1 Bcf\/d of natural gas demand each year in the outer years.<\/p>\n

The other major power story is the coal retirements due to environmental requirements.\u00a0\u00a0EPA mercury rules hit in 2015, but plants can apply for a year extension and so far no plants have been denied an extension.\u00a0\u00a0 Basically the rules force existing coal plants to be fully controlled\u00a0(scrubber, SCR, bag house\/ precipitator).\u00a0 This can cost as much as a brand new combined cycle plant.\u00a0\u00a0 Natural gas will likely need to make up a good portion of those unit retirments.\u00a0\u00a0 However, many have simply multiplied the retirement times a gas heat rate to come up with the gas demand impact.\u00a0\u00a0 This is bad math.\u00a0\u00a0 The coal units do not operate at all hours that would require a gas unit.\u00a0\u00a0 During many hours, a coal unit fleet will be at minimum operation level which could be around 40-60% of full capacity in order for the fleet to be ready for the on-peak hours.\u00a0 Off-peak hours amount to 43% of the year.\u00a0 Many of these hours will actually be made up by the existing coal fleet, so their requirement to run at minimum would be reduced.<\/p>\n

Based on some of my models, I anticipate the number to represent 30% of gas demand.\u00a0\u00a0 In total, in 2016 we could see an increase of 3 bcf\/d driven by the coal retirements from the MATS ruling.\u00a0\u00a0 Both the demand growth and coal retirements continue to make the power sector the most important piece in the puzzle with much subject to change given EPA rules.\u00a0\u00a0 For those engaged in natural gas, it is important to monitor this situation.\u00a0\u00a0 All Energy Consulting can help you out with\u00a0our power modeling outsourcing option.<\/a>\u00a0\u00a0 A more detailed breakout of the power gas demand will be available in the final report and presentation available if you email\u00a0David K. Bellman<\/a>\u00a0.\u00a0\u00a0 The report will dive into the load outlook and renewable competition.<\/p>\n

The next\u00a0major category for natural gas is the use of the raw material for chemical manufacturing and LNG exports.\u00a0 They are somewhat connected.\u00a0\u00a0 As I reported in my comments to the DOE \u2013 we need to realize the use of our natural resources which will add significantly more to the bottom line economics than to export the product only to buy the products back.\u00a0\u00a0 However, I am cognizant on the inability of the political process to make it worthwhile to bring manufacturing back into competitive setup in the US.\u00a0\u00a0 I do believe there will be a compromise needed between the corporate culture and the unions.\u00a0\u00a0 There needs to be a balance and I believe it can be done through new businesses not established companies.\u00a0\u00a0 I suspect many established companies are supporting the LNG project and the pipeline build up to deliver products to their sunken investments in the Gulf versus constructing new plants at the source.\u00a0 For the base, I have a higher outlook than EIA largely because I believe there will be balance between imports from Canada.\u00a0 An optimal US economic benefit of LNG would be\u00a0the LNG exports\u00a0equal to the amount being imported from Canada.\u00a0 It would be more of economic gain to export Canadian LNG than to let the Canadians export their own LNG.\u00a0\u00a0 Based on history this would amount to 3.5 Bcf\/d..\u00a0 \u00a0\u00a0BHP is\u00a0projecting11 Bcf\/d export from the US by 2030\u00a0<\/a>.<\/p>\n

If LNG approach the 11 Bcf\/d figure there will be a demand price response.\u00a0\u00a0 If the global market of gas demand is not growing proportionally to the increase some of the LNG investors may be hit with big losses.\u00a0 The reason I state this is the understanding of the Middle East.\u00a0\u00a0 The mentality of the Middle East cannot be ignored.\u00a0 They have and will manage the market with the focus on market share.\u00a0\u00a0 The experience in 1998 cannot be forgotten.\u00a0\u00a0 This was my 15 minutes of fame in which I was published in many national magazines predicting the crude oil collapse.\u00a0\u00a0 The basis all came from the fact the supply demand balances showed a large expansion of supply when the demand dropped out from underneath producers as Asia was the growth everyone built for.\u00a0\u00a0 Saudi Arabia at the time constrained production but eventually lost too much market share and decided to show the world the value of being constrained and as I estimated, the market went below $10\/bbl.\u00a0 I think for those who are looking into LNG export from the US need to examine the Middle East.\u00a0\u00a0 Market share erosion is not taken lightly. Qatar can easily add more capacity now if it wanted to but similar to Saudi Arabia for oil, it is managing the market. However, the management comes with a fee of maintaining market share. I, therefore, promoted some LNG exports but with foreign investors. This will put them into a take or pay situation vs. leaving US investors holding the debt on a non-used asset. If you think shale gas production which on average likely cost greater than $1\/mmbtu even with oil considerations can compete with countries like Qatar with gas production cost less than $0.50\/mmbtu, you will be in for a rude awakening.\u00a0\u00a0Shell pulled out of\u00a0a gas to liquids (GTL)\u00a0project in the US Gulf as a result of this concern.\u00a0<\/a>,\u00a0A supporting\u00a0news for LNG export volumes is\u00a0Qatar is investing in US LNG with ExxonMobil.<\/a>,<\/p>\n

Another hidden demand is the exports to Mexico.\u00a0 I expect Mexico will not be able to get their act together to manage their resource.\u00a0\u00a0 It will be much easier for them to build pipeline and import the natural gas from the US.\u00a0\u00a0 I expect this will be a surprise demand source in many of the models.\u00a0 EIA doesn\u2019t have exports crossing 2 Bcf\/d till past 2030.\u00a0 It would not be a surprise to me to see it cross over closer to 2020.<\/p>\n

Similar to the supply side, we have a much higher demand than the EIA when we add all these factors together.\u00a0 The final price outlook is \u00a0that gas prices are expected to be range bound in 2014-2015.\u00a0\u00a0 With the coal retirement and manufacturing uptick in 2016 we will likely see prices moving strongly up.\u00a0 Then LNG exports hitting in 2018 and beyond would likely give another boost.\u00a0\u00a0 The real insight will be from the high and low side development of both the supply and demand demonstrating an upside and downside risk.\u00a0\u00a0 The likely asymmetric relationship can show a great trade opportunity.<\/p>\n

A complete report for the Natural Gas Outlook with graphs and excel tables are available with a presentation, in which I will include a report with a high and low gas price developed using the key variables discussed above.\u00a0 If interested please email\u00a0dkb@allenergyconsulting.com<\/a><\/p>\n

Your Fundamental Energy Consultant,<\/p>\n

David K. Bellman<\/a><\/p>\n

614-356-0484<\/p>\n","protected":false},"excerpt":{"rendered":"

Natural gas demand outlook is probably more uncertain than the\u00a0production side of natural gas.\u00a0\u00a0 The natural gas production is limited on the upside by the technology capability and infrastructure.\u00a0 To the production downside, there is some political constraints.\u00a0\u00a0 However, the variability for natural gas demand is likely more uncertain as the upside could be quite […]<\/p>\n","protected":false},"author":1,"featured_media":14,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,3,6],"tags":[185,41,244,82],"class_list":["post-921","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-natural-gas","category-power","tag-export","tag-lng","tag-natura-gas","tag-natural-gas-demand"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/921","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=921"}],"version-history":[{"count":17,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/921\/revisions"}],"predecessor-version":[{"id":974,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/921\/revisions\/974"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/14"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=921"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=921"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=921"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}