INSIGHT: Surge in US natgas demand could spike prices soon

20 June 2013 16:00  [Source: ICIS news]

By Joe Kamalick

US natgas demand soon may outweigh production capacityWASHINGTON (ICIS)--A sharp increase in domestic and foreign demand for newly abundant US natural gas supplies could outstrip even record-setting output and lead to a shortage and price spikes within two years, according to a new natgas market analysis.

In a study issued this week, Raymond James & Associates said that “based on our sector-by-sector analysis of future US natural gas demand growth, we believe US gas prices are poised to improve over the next five years”.

“We could see a sharp gas demand surge in 2015 or 2016 that even leaves the US gas market temporarily short of gas,” said Raymond James energy analysts Marshall Adkins and Pavel Molchanov.

The report cautions that there is “the possibility of a short-lived gas price spike in 2015/16 if surging demand temporarily outpaces the industry’s ability to bring new supply online”.

The prospect of a rapid increase in natural gas prices is a concern for US petrochemicals producers and downstream chemicals manufacturers because they are heavily dependent on natgas as both a feedstock and a power fuel.

Ironically, says the Raymond James analysis, the potential spike in gas prices could in large measure be attributed to sharply increasing consumption of natgas by the nation’s petrochemicals producers.

Chemicals sector demand is only part of the picture, though.

Adkins and Molchanov note that “Across the US there is an increasing number of longer-term natural gas consuming projects, [including] ethylene crackers, coal retirements, gas-to-liquids [GTL], ammonia plants, LNG exports and exports to Mexico that should drive US gas demand steadily higher over the next decade”.

The main demand driver, however, will be industrial use, they said.

“The largest driver for industrial demand should be ethylene crackers and gas-to-liquids facilities,” the report says, noting that “Three petrochemical companies have actually filed for a permit to build the ethylene crackers, while others are proposed.”

Noting that multiple factors may side-line some of the proposed crackers, Raymond James said that “nonetheless, we believe that at least four will get built, adding nearly 1bn cubic feet per day (bcf/d) of incremental demand” for natural gas.

“Gas-to-liquids is a harder segment to forecast, given that no investment decisions have been made regarding the proposed GTL mega-projects, but if even one such facility were to get built, it would add a very meaningful amount of demand,” the study said.

In his testimony before a House Energy and Commerce Committee hearing on Thursday, Sasol senior group executive Andre de Ruyter said that the $12bn (€9bn) GTL plant that his company has planned for southern Louisiana will consume about 1 bcf/d alone.

With that and other gas-consuming projects in various stages of development, Raymond James said it expects that US industrial demand for natgas will grow from 19 bcf/d in 2012 to more than 27 bcf/d by 2017.

In addition to demand generated by new crackers, petrochemical and GTL projects, Adkins and Molchanov see still more expanding gas consumption in the nation’s electric utility sector.

“When low gas prices are paired with the Environmental Protection Agency’s restrictive regulations [on coal-fired power generation], we believe announcements of coal retirements will increase sharply over the next few years,” they said.

As of this week, the authors said, “we estimate there are 30-33 gigawatts (GWs) of announced coal-fired capacity retirements, which could equate to 2-3 bcf/d of potential additional gas demand by 2016”.

Perhaps the potential for galloping growth in gas demand most worrisome to US chemicals firms is in the multiple LNG export terminal projects now being pursued.

Adkins and Molchanov said that “there are close to 20 proposed US LNG export projects on the drawing boards, totalling over 25 bcf/d of demand”.

“Of course, the likelihood of all - or even half - of these projects getting built is remote,” they noted.

But one LNG project most likely to be realised, the Cheniere export terminal planned for Sabine Pass in Texas, would eat up 1 bcf/d of gas, beginning as early as 2016.

Also testifying on Thursday before the committee, Paul Cicio, president of the Industrial Energy Consumers of America (IECA), warned that wholesale approval by the Department of Energy (DOE) for multiple pending LNG export terminal applications would threaten domestic US manufacturing.

IECA, whose member firms include chemicals and resins producers along with steel, aluminum, paper, cement and glass manufacturers, said that “careless due diligence” by DOE in weighing industrial interests other than LNG exporters “can be a major threat to the continued growth of the manufacturing renaissance”.

Cicio’s count of pending LNG export terminal applications is 27.

A newly formed coalition of chemicals producers and aluminum manufacturers, America’s Energy Advantage (AEA), also is opposing a rush to judgement by DOE on the LNG projects.

AEA urged policymakers to “carefully consider the economic consequences before allowing unfettered natural gas exports”.

Finally, Raymond James anticipates that US gas exports to Mexico could increase by 15-25% annually over the next five years, perhaps taking an additional 0.4 bcf/d of US natgas production.

“Recently, increased Mexican gas demand for manufacturing, gas-fired power and steel companies along with a significant gas plant explosion has led to a surge in US gas exports to Mexico,” Adkins and Molchanov said.

“Given the fact that that US companies have announced several additional pipelines to bring more gas to Mexico, it looks like this trend has some legs,” they added.

In his testimony, Cicio said that if all the planned or proposed projects were to be brought online - including new crackers and petchem production along with new steel, rubber and glass production on top of LNG and GTL undertakings - they would create additional gas demand of 11.2 tcf/year.

Total US natgas consumption in 2012 was 25.5 tcf.

($1 = €0.75)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy
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By: Joe Kamalick
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