Surge in U.S. Natural Gas Production to Keep Prices Low

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. natural gas producers have become victims of their own success, as dramatic production gains from new techniques and operating efficiencies have swelled annual gas production. Increased demand from industrial facilities has been unable to soak up all the additional supply, keeping prices relatively weak. And a bad situation threatens to get worse in the coming years, as continued expansions of production will keep gas prices in the $3 to $4 per million British thermal units (MMBtu) range, speakers told an Oil & Gas industry conference this week in Denver. But by mid-2017, gas prices should reach about $5 per MMBtu, as new demand absorbs new supply, one speaker projected.

For the near term, the U.S. natural gas outlook, if not exactly rosy, certainly is better than it was a year ago, when spot gas prices briefly fell below $2 per MMBtu, speakers told attendees at the 7th Annual Platts Rockies Oil & Gas Conference. Cash prices since then have about doubled to about $4.20 per MMBtu this week. But in the views of several speakers, the market fundamentals of supply and demand will keep prices soft for several years.

There has been a "massive" growth in U.S. natural gas production since 2005, Rusty Braziel, president of RBN Energy LLC (Houston, Texas), told the conference. Production has increased about 16.2 billion cubic feet per day (Bcf/d) since 2005, to current levels of about 65 Bcf/d, he said. He predicted another 9 Bcf/d would come online by 2018, bringing production to about 76 Bcf/d.

Dramatic expansion of gas production in the Northeastern U.S., mainly the Marcellus and Utica shales, will drive the overall national production surge, he said. In northern Pennsylvania alone, it will take five years to clear the backlog of gas wells that have been drilled but are not yet producing.

Click here for charts showing increasing U.S. production of dry gas since 2005, and projected growth in gas production through 2018.

Gas producers are extracting more gas using fewer rigs as they implement multi-pad drilling strategies and capture operating efficiencies, added Brandon Blossman, director of coal/power research at Tudor, Pickering, Holt & Company (Houston, Texas). "In 2009, about 1,600 gas rigs were operating," he said, noting gas prices were much higher then. "Two years ago, that number fell to 1,000. Today, about 400 gas rigs are operating, yet production has soared," he told the conference.

Weather and demand from electricity producers are two factors driving the gas market, Blossman continued. But he said there's a lot of surplus electric generation in the U.S. right now, and even if gas continues to displace coal in electric generation, it won't be enough to soak up all the incremental production. Gas storage levels are shrinking to near their five-year average after a mild winter last year, which Blossman said was another positive factor for current gas prices. One conference speaker projected the ongoing "dash to gas" in the U.S. electricity business could add up to up to 4 Bcf/d in new demand by 2017.

Beyond the power market and the weather, speakers identified gas exports--both in liquid and gaseous form--as another factor shaping the outlook for gas prices. Construction at Cheniere Energy Incorporated's (NYSE:LNG) liquefied natural gas (LNG) terminal at Sabine Pass, Louisiana, is about 25% complete, with a targeted in-service date of late 2015 or early 2016. Cheniere is the only LNG operator with an export license, though several other developers have filed for export licenses. LNG exports will help find a new home for the surge of domestic gas production, speakers at the conference said. Braziel forecast LNG exports could account for up to 6 Bcf/d of new demand by around 2020.

Pipeline exports of gas to Mexico could further help balance domestic supply and demand, thus supporting firmer prices, according to Rick Margolin, senior energy analyst at BENTEK Energy (Evergreen, Colorado), a unit of Platts. The Mexican electricity industry is forecasting a significant expansion of its generation capacity over the next 15 years, a significant portion of which would be fired by gas. Pipeline gas exports to the Mexican power sector total about 1.8 Bcf/d today, and could double over the next five years, he forecast. A number of trans-border pipeline projects are being expanded, constructed, or are in advanced stages of development, so the infrastructure should be in place to carry these additional pipeline exports. Farther out, pipeline exports of gas to Mexican electricity generators is expected to continue rising, he said.

The BENTEK analyst also pointed to the California power market as a growth opportunity for natural gas, given the continued uncertainty over the restart of the San Onofre Nuclear Generating Station (SONGS), a two-unit nuclear generator with a generating capacity of 2,254 megawatts (MW) that has been idled since January 2012. "SONGS is a big factor in California electricity demand," Margolin told the conference. "There are a lot of questions whether that plant will ever come back."

With state restrictions on burning coal or importing coal-fired electricity, and the use of gas to provide back-up generation for renewable electricity, California looks like a good domestic market for gas producers to target, Margolin and other speakers advised.

"If you want to know where gas prices are going, I'd recommend looking at your thermometer," RBN Energy's Braziel told one conference attendee. During the two days of the conference, more than a foot of snow fell on Denver, and temperatures dropped as low as 15 degrees.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.