A Brave New World For Natural Gas?

September 1, 2015 by

natural gasKent Moors:  Last week, I delivered my major address on the future of natural gas. The occasion was a high-powered meeting hosted by Dominion Transport at the beautiful Nemacolin Woodlands Resort in western Pennsylvania.

In attendance were more than 100 leading CEOs and other executives from principal gas production, transmission, distribution, and end using companies.

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

I thought I would share my presentation with you in today’s Money Morning, as it will be especially useful as we look for opportunities with investing in natural gas. Here’s what I told my audience… the straight story on what’s happening in the LNG sector…

A Brave New World for Natural Gas?

natural-gas

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 lay out for you what I have been experiencing in the world energy 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. And that becomes clear when we sketch out the current and short-term projections for natural gas production and demand, along with the picture attending, expanding end uses for gas – electricity generation, industrial applications, for vehicle fuel, and as feeder stock for petrochemicals.

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 Aug.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 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 and 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).

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