Commentary: Risk-on for US natural gas prices

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Power demand to draw heavily on natural gas

US shale gas has transformed the global energy and chemical sectors, providing cheap electricity and petrochemical feedstock for local players. But growing global demand for gas-based power and more options for transporting gas internationally amid stagnant US production resulting from a long period of low prices could put this rosy scenario in jeopardy.

“Shale 1.0 is now over. It has changed the world and tectonically shifted the energy landscape from East to West. The US is the largest natural gas producer in the world,” said Brian Habacivch, director at the commodities management group of Constellation Energy, a US power and energy provider.

Habacivch spoke at the 9th ICIS World Chemical Purchasing Summit in Boston, Massachusetts, US.

“Shale 2.0 is about the US as an export superpower – the emergence of a Petro Super State. Risk is back on as natural gas production in the US is flat or declining while demand is booming,” he added.

Natural gas’ share of US electricity generation has surged from 16% in 2000 to 33% by 2015. In the meantime, coal’s share has fallen from 52% in 2000 to 34% in 2015, said Habacivich.

Through 2030, while overall annual energy demand growth is projected to slow from 1.9%, to 1.3%, power will gain 5 percentage points in terms of its overall share of energy demand, said Mark Routt, chief economist – Americas, at consultancy KBC Advanced Technologies, at the Summit.

And a growing piece of the power mix will be natural gas. The size of the global gas pool moving into the power sector gained around 150% since 1990. By 2030, power demand will soak up 44% of global gas supply versus 28% today, he said.

“The risk for North America is that natural gas prices will integrate more closely with higher Asia prices,” said Routt.

“Gas prices will increasingly be tied to power demand regionally in North America and Asia,” he added.

Today, the US enjoys a tremendous advantage in chemicals and other manufacturing because of its abundant gas supply from shale formations.

The amount of gas produced in Pennsylvania alone – 14.5bn cubic feet/day (bcf/day) – is enough to power all of Germany and the UK combined, noted Constellation’s Habacivch. US total natural gas production is about 72.5 bcf/day, of which 20.5 bcf/day comes from the Marcellus/Utica shale formations which includes Pennsylvania’s gas fields.

However, abundant supply forever and ever shouldn’t be taken for granted. The US oil and gas rig count is down around 60% year on year. In 2008 there were 1,500 rigs in operation. Today there are 86, said Habacivch.

And capital expenditures (CAPEX) in oil and gas have plunged. The top 65 oil and gas companies spent $240bn in 2014 and will likely spend $120bn this year, he said.

“Capital is going on strike, and supply is beginning to respond. Be advised – low prices are having an effect on supply,” said Habacivch.

And the bounty of gas produced in the US is increasingly finding a home elsewhere. The US is exporting about 3.5 bcf/day of gas to Mexico via pipeline, an amount expected to grow to 7-8 bcf/day, or 10% of US output, in three years, he noted.

And liquefied natural gas (LNG) is being exported at Sabine Pass today by Cheniere Energy. By 2020, the US will be the largest exporter in the world with around 20% of global market share. Around 25% of US gas production could be exported – a “game changer”, Habacivch said.

Meanwhile, US natural gas output has been “unspectacular”, with less gas bring produced at the end of 2015 than at the beginning. In 2016, the US will produce less gas than in 2015. “For end-users it is ‘risk-on’,” he said.

For US petrochemical producers and others planning additional US projects based on cheap shale gas, it’s worth keeping an eye on output, exports and demand from the power sector.