Key Trends Impacting Natural Gas Prices In The U.S.

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Over the past few years, natural gas prices in the U.S. have diverged significantly from those in the international markets, primarily due to the surge in supply from unconventional sources, particularly shale. After hitting a bottom of around $2.50 per thousand cubic feet in 2012, gas prices have rebound to an average of around $3.50 this year on improved demand growth prospects and the shift in energy companies’ focus towards liquids production for better returns. In this article, we take a look at some of the key trends impacting natural gas prices in the U.S.

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Growing Supply Of Shale Gas

The outlook for U.S. natural gas supply has changed significantly over the past few years, primarily due to the evolution of horizontal drilling and hydraulic fracturing; these techniques have enabled energy companies to tap the huge shale gas reserves in the U.S. at commercially sustainable rates. Widespread use of these techniques started only during the early 2000s in the Barnett shale play in north-central Texas. However, since then, natural gas production in the U.S. has ramped up much faster than the growth in consumption, which has led to severely depressed commodity prices by international standards.

Today, natural gas prices in the U.S. are less than half of that in the Europe and less than one-third of that in the LNG (liquefied natural gas) dependent Asian economies, such as Japan. Huge recoverable reserve estimates lead the EIA to believe that shale gas would account for ~50% of the total natural gas production in the U.S. in 2040. [1] Additionally, as the industry’s understanding of the shale resource basins continues to grow, leading to more productive wells, drilling costs are expected to trend lower. We therefore expect natural gas prices in the U.S. to remain depressed by international standards in the medium to long term.

Growing Use In Electricity Generation

Electricity generation is expected to boost natural gas demand in the U.S. in the long run. This is because of the fact that natural gas has much lower carbon intensity compared to coal, for which it is favored by governments planning to reduce greenhouse gas emissions in several countries. Additionally, it is an attractive alternative fuel for new power generation plants because of relatively low capital costs and the favorable heat rates for natural gas generation. We expect the implementation of the proposed regulatory rules, particularly the Mercury and Air Toxics rule (MATS), to push utility companies towards natural gas by driving unit production costs from coal higher.

Even under the current regulatory framework, the EIA expects the share of natural gas in electricity generation to surpass that of coal in the long run. According to the recently released Annual Energy Outlook 2014, it expects natural gas consumption in electricity generation to grow from 8.5 trillion cubic feet (tcf) per year in 2012 to 11 tcf/year by 2040. [2]

Growing Use In The Industrial Sector

Low natural gas prices in the U.S. provide the domestic industrial sector with a cost advantage over their international peers. Manufacturers are investing billions of dollars on the U.S. gulf coast to tap this feedstock advantage. Dow Chemical, one of the biggest chemical companies in the U.S., plans to invest over $4 billion in constructing ethylene and propylene plants over the next few years to feed its downstream plastics manufacturing units. (See: Dow Continues Its Expansion In The Gulf Coast On Favorable Feedstock) The EIA expects natural gas consumption by the U.S. industrial sector to increase from around 18 billion cubic feet (bcf) per day in 2012 to over 23 bcf/day by 2040. [2]

Rising Exports

Export demand is expected to play a key role in lifting natural gas prices in the U.S. despite surging supply from the shale gas resources. Pipeline exports to Mexico are already growing and LNG exports from the Lower 48 states are further expected to boost natural gas demand in the long run. (See: Energy Companies Are Set To benefit From Natural Gas Exports)

In 2012, the U.S. was a net importer of natural gas, with approximately 2 trillion cubic feet of natural gas imported primarily from Canada. However, the EIA expects the U.S. to become a net exporter of natural gas by 2016, and export approximately 6 tcf of natural gas per year by 2040, net of imports. LNG exports from Alaska and the Lower 48 states are expected to grow to more than 3 tcf per year by 2030. [2]

Growing Use In The Transportation Sector

Low natural gas prices in the U.S. are also behind its growing use as a transportation fuel. While the average price of diesel is above $4 per gallon, the same amount of CNG (gallon gasoline equivalent) can be bought for almost half the price in the U.S. [3] The efficiency of a machine in converting either of these fuels into power is also an important factor and does partially offset the price advantage of CNG over diesel in some cases. However, this particular CNG-powered Freightliner provides operational gains over the traditional fuel despite having around 10% lower fuel efficiency compared to its diesel alternative.

Natural gas vehicles also offer a significant opportunity to reduce green house gases emissions. According to the Center for Climate and Energy Solutions, the use of LNG and CNG as alternatives to diesel can reduce carbon intensity (the amount of carbon by weight emitted per unit of energy consumed) measured in gCO2e/MJ by 13% and 29% respectively. The same study suggests that reductions of conventional air pollutants from natural gas vehicles are also significant. [4]

However, the absence of a robust fueling infrastructure for CNG has been the most prominent factor dampening the rate of adoption of natural gas powered vehicles. Including both public and private, the total number of CNG fueling stations in the U.S. stands at 1290. This compares to about 180,000 gasoline stations. [5] Apart from this, high initial costs of LNG/CNG vehicles as compared to their gasoline alternatives have also negatively impacted their demand. Currently, LNG powered tractor-trailer trucks cost around $75,000 more than the ones that run on diesel. However, we believe that increasing mass production and competitive forces are expected to drive this premium down in the long run as these products gain wider acceptance. FedEx CEO, Frederick W. Smith expects up to 30% of long-distance trucks to be powered by liquefied (LNG) or compressed natural gas (CNG) over the period of next 10 years. [6]

Notes:
  1. Natural gas Outlook 2013, eia.gov []
  2. Annual Energy Outlook 2014, eia.gov [] [] []
  3. U.S. Energy Information Administration, eia.gov []
  4. Natural Gas Use In the Transportation Sector, c2es.org []
  5. Alternative Fueling Station Counts by State, energy.gov []
  6. FedEx Truck Fleets To Shift To Natural Gas From Diesel, hydrocarbonprocessing.com []
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  • commented 1 months ago
  • tags: COP
  • thanks for your take on the info-It looks like liquid might be the way we're going go right now, but there are so many uses it's hard to say if both won't make up significant plays for industry and power production in the near future.