U.S. Natural Gas Production Expected to Outstrip Demand Growth

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. natural gas production is expected to continue surging, but demand is not projected to rise as rapidly, speakers told the 26th Annual Rocky Mountain Energy Summit, sponsored by the Colorado Oil & Gas Association (COGA) (Denver, Colorado), in Denver. The implication? Years of oversupply that will keep average gas prices below $5 per million British thermal units (MMBtu).

Speakers at last week's COGA conference didn't discuss natural gas prices. They didn't have to: attendees could freely check NYMEX natural gas futures prices, which show gas trading in a narrow range of $4 to $5 per MMBtu through late 2020.

But several conference speakers mentioned an oversupplied domestic gas market. Some questioned whether future demand growth from industrial users, power plants and liquefied natural gas (LNG) exporters would be enough to soak up surging future production. So prices in the $4 to $5 per MMBtu range might be the best-case scenario.

One speaker, Tony Chovanec, senior vice president of fundamentals at Enterprise Products Partners LP (NYSE:EPD) (Houston, Texas), titled his talk "Please Start Using More Gas, Electricity and Gasoline." A second speaker, Rick Smead, managing director at RBN Energy LLC (Houston), titled his talk "U.S. Natural Gas Supply and Demand: Abundance Really Sets In."

A third COGA conference speaker, Dawn Constantin, head of partnerships and analytics for BP Energy Company (Cleveland, Ohio), a unit of BP Plc (NYSE:BP) (London, England), highlighted how policy and technological changes are reducing forecast demand among power generators and Industrial Manufacturers. Asked about her outlook, which some audience members said was pessimistic, she said she is sometimes called an optimist.

RBN's Smead told about 1,000 attendees the U.S. gas markets have gone from a period of "Golly, we have a lot of gas" to "Oh man, we have a ridiculous supply of gas."

"Massive growth [in supply] nationally, and in the Northeast, have left us with a very strange market," Smead said.

Natural gas production is projected to rise to about 90 billion cubic feet per day (Bcf/d) by 2030, but demand that year is only expected to reach about 85 Bcf/d, according to projections from the U.S. Energy Information Administration (EIA) (Washington, D.C.).

Click on the image at right to see EIA's projections of U.S. natural gas supply and demand through 2030.

Smead said the EIA has for years underestimated gas production from shale formations. He said the agency's estimates of gas production from shale formations could be as much as 10 Bcf/d below actual production by 2030. If it materializes, this added supply to an already oversupplied market--while good news for energy security--could act as a further drag on gas prices.

Smead noted soaring production from the Marcellus Shale, which has risen about 3 Bcf/d in 2010 to about 15 Bcf/d this year, and is projected to grow to about 28 Bcf by around 2020.

Click on the images at right to see EIA projections of U.S. shale gas production versus actual production levels, and a graphic showing actual and projected production from the Marcellus Shale.

Smead and other conference speakers referenced the critical role LNG exports are expected to play in balancing gas supply and demand in the U.S. He noted that applications to export a total of 35 Bcf/d have been filed with federal regulators. But that number is about 5 Bcf/d over projected global increase in demand for LNG.

"Is it reasonable to think that we're going to win more than 100% of global demand growth for LNG?" Smead asked. He estimated U.S. LNG exports ultimately would total about 10 Bcf/d to 12 Bcf/d, and that the U.S. Department of Energy already has approved applications to export about 9 Bcf/d of LNG. So domestic gas markets are unlikely to be saved by a surge in LNG exports, he concluded.

Smead's outlook, while not particularly optimistic, might not be the worst-case scenario. Enterprise's Chovanec said that his company's "high" estimate for gas production was 112 Bcf/d in 2020, about 18 Bcf/d higher than its "base case" scenario. And in 2025, Enterprise's "high" production scenario envisioned gas production totaling 127 Bcf/d, roughly double the nation's production in 2011.

Through 2020, Chovanec projected demand for gas would increase in the following sectors:

• Power Generation: 4 Bcf/d to 7 Bcf/d
• Industrial/Chemical Processing: 3 Bcf/d to 4 Bcf/d
• Natural Gas Vehicles: 1.5 Bcf/d to 2.25 Bcf/d
• LNG and Mexico Pipeline Exports: 8 Bcf/d to 10 Bcf/d
• Residential and Commercial Sectors: 0.5 Bcf/d to 1.5 Bcf/d

In total, the Enterprise executive projected gas demand would rise by between 17 Bcf/d and 25 Bcf/d by 2020--far less than the 38 Bcf/d envisioned in the firm's "high" scenario. However, the firm's base case envisions a supply increase of about 20 Bcf/d between 2014 and 2020, which would strike a good balance between supply and demand.

Because a large and growing portion of natural gas and crude oil will be coming from "wetter" gas streams in the Eagle Ford, Permian, Bakken and Denver-Julesburg (D-J) formations, Chovanec predicted domestic supplies of ethane, propane and butane would remain "chronically oversupplied" through 2020.

BP's Constantin said natural gas demand will grow going forward, but the rate of growth in the power and industrial sectors will be held down by efficiency and technology changes in those sectors.

Demand growth for gas in the electric power sector will be held down by consumer efficiency programs that will keep annual electric demand growth to less than 1%, Constantin said. And industrial manufacturers have installed technology or changed processes that will work to hold down demand growth rates there, Constantin added. For example, the rise of 3-D printing in the manufacturing sector will reduce the demand for injection molding. And steel and aluminum are increasingly being made from recycled scrap product, which takes 75% less energy than traditional production methods.

Still, Constantin said the outlook for gas demand growth in the industrial and power sectors was "bright," though there were significant risks to that demand growth going forward.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, 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.