Conference Speakers: U.S. Gas Production Expected to Continue Outstripping New Demand, Keeping Prices Low

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. natural gas producers can expect a rocky next five years, as supply growth will continue to outpace demand growth, keeping price increases modest, Rick Allen, director of oil and gas consulting services at S&P Global Platts, a unit of S&P Global Incorporated (NYSE:SPGI) (New York, New York), told an estimated 1,150 attendees at the annual energy conference in Denver sponsored by the Colorado Oil & Gas Association (COGA) (Denver, Colorado) on Tuesday.

"It's funny, the last time I spoke here, three years ago, the dominant view was, 'If we produced a hydrocarbon--crude oil, natural gas or liquefied petroleum gas (LPG)--that product would find a home somewhere in the world," Allen recalled August 23 at COGA's 28th annual Rocky Mountain Energy Summit (RMES). "But today, the world is saying, 'We have enough.' "

As Allen surveyed the gas market, he began by saying, "As a forecaster, no one expects you to get it exactly right." Later in his talk, he recounted some of his forecasts that were overly pessimistic or overly optimistic compared with actual results.

In determining how the next five years will affect U.S. natural gas companies, Allen said there were several factors that bear watching. How those factors unfold will go a long way in shaping the supply, demand and price of U.S. natural gas. "The continued growth of U.S. gas production is highly dependent on export demand growth, which is inherently uncertain, particularly in an oversupplied market," the S&P forecaster said. "We expect the Northeastern U.S. to remain the largest production region, larger than even Texas. But the risk of pipeline delays in the Northeast could affect gas production growth and prices."

He emphasized he was not predicting the numerous gas pipeline projects under development in that region would be delayed. Instead, he challenged audience members to think about what pipeline project delays could do to gas prices. He also encouraged them to think about the industry's track record in getting projects approved and built on time. Though he created some deniability, he seemed to be obliquely suggesting some pipeline projects in the Northeast were more likely than not to be delayed.

The U.S. recently shipped its first cargo of liquefied natural gas (LNG), marking its entry into an oversupplied global LNG market, he observed. Asian spot prices for LNG now hover around $8 per million British thermal units (MMBtu), down more than half from prices a few years earlier, and Allen predicted the global LNG market will remain oversupplied until at least 2021.

Global LNG capacity is expected to rise from its current level of about 41 billion cubic feet per day (Bcf/d) to about 60 Bcf/d in 2021, a 46% increase in an already glutted market, he said. Global demand growth has stalled, he added. U.S. LNG liquefaction capacity is expected to reach 10.1 Bcf/d in 2021, but S&P expects U.S. LNG exports to peak at only about 5.9 Bcf/d by then, he forecast.

Allen's relatively downbeat view was echoed by another RMES speaker, Scott Moore, vice president of worldwide marketing for Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas). "For the next few years, global markets will be unable to absorb all the new LNG capacity that's been built in recent years," he told the conference Tuesday. Global demand growth may require more LNG capacity coming online by 2023, Moore said, which means developers hoping to catch that increase should start building new facilities starting in 2017 or 2018.

Overall U.S. gas production is expected to grow by about 15 Bcf/d by 2021, with about 10Bcf/d of that new production coming from the Northeast, meaning the Marcellus and Utica shales, Allen told the COGA conference. But the demand for gas from power producers, so robust in recent years, is expected to moderate significantly in the near future, removing critical demand growth that has supported gas prices, Allen predicted.

His co-panelist Moore of Anadarko agreed: "There was an unprecedented growth in power burn in 2015, as coal to gas fuel switching drove new demand." But he predicted gas use by electric generators will decline by several Bcf/d in the first half of 2017. "The coal-to-gas switching trend is tapering off," Moore told RMES attendees.

It could get worse. Allen told conference attendees that delays in proposed pipeline projects in the Northeast could reduce demand "substantially" during 2018-2020, which would tend to lower prices unless other sources of demand materialized. He said over a dozen pipeline projects in the Northeast with total capacity of about 25 Bcf/d were scheduled to come online by the end of 2018.

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