Natural gas is a key driver of the U.S. economy due to its use as a direct fuel, fuel for electric power generation, and manufacturing feedstock. Earlier this year, the U.S. Energy Information Administration released its Annual Energy Outlook 2014 with analysis and projections to 2040 on all aspects of the energy sector. The report identified several significant factors affecting the natural gas market.
Natural Gas Consumption
Most natural gas consumption growth will come from the electric power generation industry. Natural gas prices are expected to remain attractive compared to other generation fuels. As a result, natural gas-fired generation will continue to be built as a replacement for retiring coal-fired generation. Increases in natural gas consumption are also expected in the commercial and industrial end-user segments as the economy grows. An interesting element of the usage forecast is an increase in the transportation segment. Look for increased use of natural gas by trucks, locomotives, and ships.
However, the use of natural gas in the transportation industry is driven by the price differential between crude oil and natural gas. If oil prices continue to remain low, natural gas use in this sector could be almost non-existent. The only segment expected to experience deceased usage is the residential market. A decrease is residential usage is forecast due to population shifts to warmer regions and increased efficiency in residential gas-fired appliances.
Shale Gas Impacts
Natural gas prices directly affect electricity rates and manufacturing costs. Production costs are expected to rise as producers move into areas that are more complex and difficult to explore and develop. Price levels will be dampened by increased production from deposits like the Marcellus shale play. Located in Appalachia, the Marcellus shale play has significantly changed natural gas supply and transportation patterns.
Previously, most natural gas serving eastern U.S. markets was transported from the Gulf Coast hubs. Marcellus shale production, however, has offset nearly 30% of that transportation need. Environmental concerns with production methods such as fracking could ultimately affect the cost of shale gas production and its impact on prices. Most production growth in natural gas is expected to come from shale gas with no significant increases in offshore or conventional onshore production. As goes shale gas, so goes the domestic natural gas market.
Natural Gas and the Economy
Macroeconomic factors also affect natural gas prices. Higher economic growth rates lead to higher natural gas prices due to increased housing starts, growth in commercial facilities, and increases in industrial production.
Another key indicator in the natural gas outlook is the impact of exports on prices. The increase in supply from shale gas production and other sources is greater than the increase in demand. This creates downward pressure on natural gas prices, which makes export attractive. In North America, this leads to decreased pipeline imports from Canada and increased exports to Mexico.
Liquefied Natural Gas (LNG) exports to Asia are also forecast to increase. LNG has created more of a global economy for natural gas and expanded the market fundamentals beyond North America. As exports increase, excess supply will be mitigated and price support will develop. The key to the growth in LNG export market will be the cost differential with crude oil. High oil prices will drive significant growth in LNG exports during the next decade while low oil prices will keep exports near current levels.
Overall, the outlook is for natural gas prices to rise. However, the rate of increase should be much slower and less volatile than experienced in 2003 to 2008. The overall increase is not expected to result in sustained prices in excess of $5/MMBtu before 2020. If this level of natural gas price stability materializes, similar stability should be seen in electricity prices during that time.