OUTLOOK '09: US carbon politics may lift natural gas demand

06 January 2009 20:15  [Source: ICIS news]

By Ryan Hickman

HOUSTON (ICIS news)--The environmental aspirations of US President-elect Barack Obama may help push up natural gas demand in 2009 even though a weak economy and slowing industrial appetite will weigh on gas prices, sources said.

"Demand is down; people are being careful with their money and energy use," said R. Skip Horvath, president of the Natural Gas Supply Association (NGSA).

In addition to residential energy users, industrial consumers of natgas including chemical companies - are also reducing gas consumption because of the tightened lending environment and the ailing economy.

"Until that gets resolved we will see that downward pressure on prices," Horvath said.

Front-month NYMEX natural gas futures were around $5.85/m Btu as 2008 drew to close, down by around 18% from the end of 2007.

The NGSA forecasts that in the next few months natural gas prices will stay flat compared with the 2006-2007 northern hemisphere winter.

The poor economy, relatively mild winter weather and a 7.9% rise in gas production throughout the winter season will extend the slide in natural gas prices, the NGSA said.

The US chemical industry is heavily reliant on natural gas as a feedstock and for operating energy.  Many companies have sharply curtailed production as chemical prices have fallen in the last few months.

In December, 3M and Dow Chemical together closed more than 20 plants permanently and temporarily shut down about 180 units.

The US Energy Information Administration (EIA) predicts that the Henry Hub spot price will average $6.25/1,000 cubic feet (mcf) in 2009, compared with $9.17/mcf in 2008 and $7.17/mcf in 2007.

The administration expects consumption in the residential, commercial and electric power sectors will grow slightly in 2009 while industrial demand will weaken.

The worldwide economic downturn should account for shrinking US industrial production, cutting natural gas consumption in that sector by 2.4%, the EIA said.

That outlook is in line with the NGSA's prediction that electricity generators' consumption of natural gas which is relatively cleaner burning than its major competitor, coal will continue to outpace industrial users, a shift in US demand that occurred for the first time in 2007.

"That's going to be true this year and there's no turning back," Horvath said. "Natural gas is the choice fuel for power generation now."

Horvath said need for natural gas could get an upward jolt if energy legislation pushed by the new Obama administration requires reduced carbon emissions.

"Carbon reduction will look to us as an increase in demand," Horvath said.

One possibility from the Obama White House and Democrat-controlled Congress is cap-and-trade legislation that would aim to force US greenhouse gas emissions to 80% below 1990 levels by 2050.

A move to a cap-and-trade system would encourage electric utilities to switch from coal to natural gas.

The electricity industry has gas-fuelled plants that function only during high-demand times of the year.

Horvath said such "intermediate peaking units" can be quickly utilised to provide cleaner and faster power than coal or nuclear to the industrial sector.

"Electric generation will turn to those intermediate peaking units because it's the only way to lower their carbon footprint," he said. "When we turn to the need for a quick carbon fix...they are sitting there not being used right now."

Other gas-favourable measures could be a proliferation of renewable energy sources such as wind and solar power, and requiring public buildings to be more energy efficient. Such alternative sources of electricity would need natural gas as a back-up when there is insufficient sunlight or wind.

"To provide a reliable electric delivery system with solar or wind you have to have a back up for that," said John Guy, deputy executive director of the National Petroleum Council, an advisory committee to the Secretary of Energy.

"That typically is natural gas. I can't think of another fuel that will be available on that sort of interruptible basis other than natural gas," he said.

Obama has named Nobel Prize-winning scientist Steven Chu, an advocate of renewables, as his choice to replace Samuel Bodman as energy secretary.

On the supply front, the EIA projects domestic natural gas production to rise 0.9% in 2009, on top of an increase of 5.4% in 2008.

Imports of natural gas could also potentially rise, although US prices are making investments in the liquefied natural gas (LNG) sector less attractive.

There are only eight US LNG receiving terminals currently operating, but eight more North American terminals have been approved by the US Federal Energy Regulatory Commission and are under construction.

Another 21 US terminals have been approved but have not broken ground as of October.

The EIA predicts that US imports of LNG in 2008 could total about 360bn cubic feet (bcf) and slightly more than 400 bcf in 2009.

In the longer term, domestic production could also get a political boost. In October last year, a 27-year-old congressional ban on drilling in 85% of US offshore territories expired. Obama has said expansion of offshore drilling would be considered in his energy plan.

"We don't think the Democrats will reinstate the full ban," Horvath said.

Most of US natural gas imports come by pipeline from Canada, a country that has potential to mark progress on planned expansion its network in 2009.

The most intriguing North American pipeline project moved another step forward in August when Alaska governor and Republican vice presidential candidate Sarah Palin approved a contract for a pipeline carrying natural gas from Alaska through Canada to US markets.

The 2,744km pipeline is expected to meet political opposition in both countries as the initiative moves forward in 2009.

To discuss issues facing the chemical industry go to ICIS connect

By: Ryan Hickman
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