May 2009 Vol. 236 No. 5

Web Exclusive

Perfect Storm of Tough News: Wood Mackenzie Analyzes Power & Natural Gas Outlook

Unprecedented demand destruction and deferral, coupled with the economic downturn and record sales declines, are creating a challenging near- and mid-term operating environment for the electric power industry, according to research and consulting firm Wood Mackenzie.

“The power industry is headed into the ‘Perfect Storm’ low-price operating environment, which will likely get worse before it gets better,” said George Given, Head of Global Power for Wood Mackenzie.

“The market is experiencing unexpectedly strong, negative load growth and weak recovery, along with very low fuel prices which are compressing margins. Compounding the situation is significant amounts of new capacity – much of which is coal – coming on-line now through 2013 that will sustain the ‘overbuild’ and delay the rebound. ”

The unregulated sector within the power industry will be most affected by the current downturn. Low margins and difficulty with financing are expected to further stress balance sheets and jeopardize debt coverage, potentially leading to mothballings and asset retirements to adjust supply-demand balance. Wood Mackenzie also anticipates that as the credit situation improves, the industry will look to portfolio rebalancing and distressed asset sales to help create new opportunities.

While Wood Mackenzie anticipates moderate recovery over the 2010-2015 period, they do not predict levels near those of 2007 or 2008 anytime soon. Given these market parameters, a dramatic renewable energy build-out could also be affected short-term, absent government endorsement and support.

“Although carbon regulations and more renewable generation have caught the public’s attention, the reality of realizing these goals seems out of synch with the current market environment and the near-term outlook,” explained Given. “In fact, in many markets but not all, the slower-than-expected recovery could very well impede the implementation of these new regulations, as well as the build-out of new power generation capacity, including renewable energy.”

The precipitous downturn in the power industry will also influence a decline in the natural gas market, which is a victim of the same influences as the electricity market.

Jen Snyder, North America Natural Gas Principal Analyst for Wood Mackenzie, said there are three key challenges facing natural gas industry in the short and intermediate term. First, difficult conditions in the power market, including lower generation loads and new coal capacity coming online, are reducing demand for natural gas. Second, the wave of global liquefied natural gas (LNG) capacity and oversupply in Europe and Asia will depress natural gas prices worldwide and subsequently attract additional LNG cargos to the US.

“The natural gas industry is a ‘victim’ of its own dramatic success in developing new supplies,” Snyder said, “The industry is now long supply in a weak environment. We expect prices will not rebound until demand picks up, and we don’t see demand starting to pick up until 2012, when the coal build stalls, and the global market starts to tighten and draws LNG cargos away from the US.”

“Further cuts in drilling can reduce supply, but also put downward pressure on costs. So any price increase or perception of market recovery will be met by highly productive wells,” Snyder added.

An important factor is demand from the power sector, as Snyder explained. “Contrary to conventional thinking, even as the economy recovers around 2010, Wood Mackenzie forecasts that demand for natural gas will lag largely due to the displacement of gas from new coal capacity. It isn’t until the wave of new coal capacity ends around 2013 that we see gas picking up where the additional coal capacity comes off.”


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