August 2011, Vol. 238 No. 8
Features
New Outlook Says Natural Gas Could Help Industrial Sector Recover
The latest “Summer Outlook” by the Natural Gas Supply Association (NGSA) indicates that consumers of natural gas will benefit from stable and steady natural gas prices, which should also help the nation’s recovering industrial sector.
“This is the third year in a row that we’ve seen a stable market for natural gas. We anticipate that the trend has legs not only because of the shale plays now being developed, but because of all our supply
sources,” said R. Skip Horvath, president and CEO of NGSA, a Washington, DC-based trade group.
“We expect industrial demand to be our most significant growth sector this summer. Although not yet at pre-recession strength, primary metals demand for natural gas is climbing and seems poised for continued growth. At the same time, overall industrial demand for natural gas is positioned to match or surpass pre-recession levels,” Horvath said.
The NGSA 2011 Summer Outlook analysis examines publically available data on individual demand and supply factors, and projected the combined potential effect on natural gas prices for summer. It also identifies emerging trends to watch.
Assessing the five key published factors – economy, weather, customer demand, storage and production – NGSA said a forecasted milder summer, as compared to last summer, is the only factor expected to place downward pressure on prices, while each of the other key factors contributing to
the forecast are expected to provide level pressure on prices.
NGSA said one sector to watch is electric power generation, predicting that power generators will continue to switch to natural gas rather than coal due to low natural gas prices. This would make 2011 the third consecutive summer of the coal-to-gas switching phenomenon, and the largest amount of switching yet. Switching from coal to natural gas averaged about 1.8 Bcf/d during summer 2010 and is projected to average 2.6 Bcf/d this summer, a 44% increase.
Customer demand, the economy, production and storage inventories all are projected to grow, but at moderate rates that are similar to last summer, placing overall flat pressure on natural gas prices. NGSA said that when combined, the five key factors will likely have an overall neutral impact on natural gas prices this summer compared to 2010.
NGSA noted that last summer’s record-breaking heat resulted in 22% more cooling degree days than the previous summer and 18% more than the 30-year average. In contrast, the National Oceanic and Atmospheric Administration’s (NOAA) forecast for this summer predicts weather that is 3% cooler than the 30-year average and 18% cooler than last summer.
The Summer Outlook report cautioned that a stronger than expected industrial rally, significant weather-related events, or unexpected bans on shale production could impact the forecast.
NGSA relied on Energy Ventures Analysis and the Energy Information Administration’s projections of natural gas production, estimating overall production would be 62.1 Bcf/d this summer, which would be more than last summer’s average daily production of 59.1 Bcf/d. However, when lower imports from Canada and LNG are taken into account, increases in production would not likely be large enough to significantly affect prices.
The NGSA analysis is based on publicly reported data. The association does not project actual cost figures for wholesale or retail markets.
Goldman Sachs Sees Gas Prices At $6 By 2015
While predicting that U.S. natural gas prices will reach $6 per million Btus by 2015, Goldman Sachs analysts projected they will average just $4.25 in the near term as new shale gas continues to flow into the market.
After next year, Goldman said it expects that a combination of coal-fired power plant retirements and a rise in industrial demand will erode more of the gas surplus and strengthen prices. In addition, long-term U.S. natural gas demand may be further supported by possible delays in the construction or license renewals of nuclear power plants as well as by potential U.S. LNG exports, the bank said
“We believe that U.S. natural gas prices will likely be supported above the $6 range from 2015 onward,” the analysts said in a note to clients.
Record Demand In 2010 Boosts Outlook For Robust Growth Through 2020
The Energy Information Administration said the total of more than 22.1 Tcf of natural gas demand in 2010 was the highest-ever level in the U.S. — exceeding the previous high point established in 2000 by more than 10%.
With 2010 setting new records for natural gas demand, Gas Technology Institute — an independent, not-for-profit R&D organization serving the natural gas industry — sees the coming decade as a period of continued robust growth.
“The economic and clean energy benefits of natural gas are helping to drive market demand,” says David Carroll, president and CEO of GTI. “The outlook for natural gas demand remains robust, thanks to the remarkable expansion of natural gas supplies in recent years and very attractive end user prices. We believe that gas demand will likely reach 24-26 Tcf by 2020 while also helping to reduce carbon emissions.”
Future growth in demand will be led by the power generation sector, where natural gas is poised to help offset an expected wave of older coal-fired power plant retirements across the country. Power generation demand in 2010 was at an all-time high, 40% higher than demand in 2000. Industrial demand also bounced back sharply from pre-recession levels.
“New power generation gas demand will be complemented by a continuing industrial rebound,” says William Liss, managing director of GTI’s End Use Solutions. “Low natural gas prices are helping to expand domestic manufacturing — particularly in the chemical, petrochemical, and food production and processing segments.”
The natural gas industry is also experiencing growth in residential and commercial market sectors. In 2010, residential natural gas demand was the highest since 2003, while commercial customers used more gas than at any time since 1997. While muted by appliance and building energy efficiency improvements, natural gas is well-positioned to continue to efficiently meet building energy needs as an environmentally friendly energy source.
An area in which GTI anticipates major growth in demand is transportation sector where fleet owners are increasingly turning their attention to natural gas vehicles for their economic benefits. Current prices of compressed natural gas for vehicle use are about $1.95/gallon according to a January 2011 DOE Clean Cities fuel price survey. In 2010, NGV use was at an all-time high and nearly twice that reported in 2000. With a large fuel price advantage and an expanding number of vehicle options entering the market, the coming decade should see a strong expansion of NGV use in the U.S.
MIT Study Says Gas Could Lead To Lower Carbon Future
A new comprehensive look at the role of natural gas in reducing global carbon emissions was released by the Massachusetts Institute of Technology.
In the U.S., the emergence of new shale gas supplies creates opportunities for natural gas to replace less environmentally friendly fossil fuels – coal and oil – in generating electricity, heating homes, making chemical feedstocks, and fueling cars and trucks, the report says.
The 170-page “The Future of Natural Gas” report from MIT’s Energy Initiative also recommends government policies and government-funded research that could lead to more natural gas use as a “bridge to a lower-carbon future.”
The report’s key conclusions include:
* Much of the world’s abundant supplies of natural gas can be developed and produced at relatively low cost. Because of this abundance, the use of natural gas worldwide is likely to continue to expand.
* In a carbon-constrained economy, the relative importance of natural gas is likely to increase even further because it can maintain energy supplies while lowering CO2 emissions.
* Replacing coal with natural gas to make electricity in the U.S. is the lowest-cost way to reduce CO-2 emissions by up to 50%.
* As more wind, solar and other renewable energy come online, natural gas-fired power capacity will become a more important backup source of power. Gas will be used to smooth out the intermittent power generation of renewables. However, renewable power also will displace some natural gas-fired power in the U.S.
* Abundant U.S. natural gas supplies will maintain a relatively low price, making U.S. manufacturing more competitive.
* Little natural gas is used by cars and airplanes, but the small natural gas market share in the transportation sector should grow. Compressed natural gas will win converts for high-mileage fleets such as buses and taxis. But gas converted to liquid fuels for transportation offer advantages over CNG and might “be the best pathway to significant market penetration.”
U.S. Shale Oil Output To Reduce Imports
Rising output from shale formations may reduce U.S. imports of low-sulfur crude oil by 500,000 barrels a day within five years as new pipelines carry the oil to refineries along the Gulf of Mexico, according to a study by analysts at Purvin & Gertz Inc.
Shale production should rise to about 900,000 bpd by 2015 and to more than 1.3 million bpd by 2020, displacing imports, said Geoff Houlton, a vice president at the Houston-based energy consultant. The study includes output growth from the Bakken formation in North Dakota, Eagle Ford in Texas and Niobrara in Colorado and Wyoming.
The discount for U.S. benchmark West Texas Intermediate crude vs. European Brent, which widened to a record $21.80 a barrel June 14, may shrink to as little as $2 after pipeline expansions are finished at Cushing, Oklahoma, Houlton said. Crude supplies at the hub, where New York Mercantile Exchange WTI futures are delivered, reached a record 41.9 million barrels in April. The U.S. imported 9.16 million bpd of crude last year.
Keystone XL TransCanada’s Keystone XL expansion, designed to transport as much as 700,000 bpd of crude from Alberta’s bitumen reserves through Cushing to refineries in Texas starting in 2013, awaits State Department approval. Enterprise Products Partners LP and Energy Transfer Partners LP proposed the Double E pipeline to transport 450,000 bpd from Cushing to Houston by late 2012. Magellan Midstream Partners LP plans to reverse part of its Longhorn pipeline to carry 200,000 bpd of crude from West Texas to Houston.
“That Enterprise line is the one to eliminate the pressure,” Houlton said. “You really need something that adds to the takeaway capacity.”
Refiners also plan to increase the use of local crudes from oil shale formations.
Valero Energy Corp. is running more than 40,000 bpd of Eagle Ford crude at its Three Rivers refinery in Texas and expects to increase the amount to 60,000, or 60% of total capacity at the plant, by year end.
Flint Hills Resources LLC plans to refine a significant portion of Eagle Ford crude in its 280,000-bpd refinery in Corpus Christi, TX, said a
spokeswoman. The increase in the local grade being processed “will back out foreign, waterborne-imported crude,” she said.
Frontier Oil Corp. is evaluating options to increase the use of shale crude at its refineries in Wyoming and Kansas, a spokeswoman said.
“We are excited by the growing opportunity provided by the Niobrara production in close proximity to both of our refineries, particularly Cheyenne, which has the capability to process the full current production from the basin,” she said.
Oil, Gas Reserve Growth Reaches Five-year High
End-of-year oil reserves grew 11% and gas reserves grew 12% in 2010, the strongest combined annual growth posted in the five-year period analyzed by Ernst & Young LLP in its 2010 U.S. E&P benchmark study. Ending oil reserves for the companies reviewed were 17.8 billion barrels while ending gas reserves were 174.3 Tcf as a result of strong shale development. The benchmark study includes the 50 largest companies based on 2010 end-of-year oil and gas reserves estimates. Activity related to XTO Energy (which was acquired by ExxonMobil in 2010) is also included in the study. The full report is available at www.ey.com/us/oilandgas.
Technological advances enabled increased shale oil and gas development and significant increases in reserve or production replacement rates. The oil production replacement rate from all sources – including extensions and discoveries, improved recovery, revisions, purchases and sales of proved reserves – was 234% in 2010. The all sources natural gas production replacement rate was 252% in 2010.
More importantly, production replacement rates, excluding purchases and sales, were also very strong in 2010 at 205% for oil, 249% for gas, and 232% on a combined BOE basis.
Reserve replacement costs on a total basis, including proved property acquisitions, were up once again, increasing to $15.26 per BOE in 2010 from $12.78 per BOE in 2009. Reserve replacement costs on a finding and development basis, excluding proved property acquisitions, increased to $17.84 per BOE, up from $13.01 per BOE in 2009.
“Oil prices generally traded in the $70-80 per barrel range for most of 2010,” said Marcela Donadio, Americas Oil & Gas Leader for Ernst & Young LLP. “And while natural gas prices were weak, they were stable in 2010. This created a healthy environment for investing in finding reserves and the technology for producing them. Stability in price – despite an uncertain regulatory environment – made reserve replacement and growth possible.”
Proving an active year for industry acquisitions, this year’s E&P benchmark study finds that total upstream spending – including acquisitions of proved and unproved properties, as well as exploration and development spending – more than doubled in 2010, up from $72.8 billion in 2009 to $177.9 billion in 2010.
Capital spending for exploration was up 8% in 2010, while development spending increased 36%, primarily due to shale development, both for gas and oil. On a combined basis, the increase in exploration and development spending was primarily driven by ExxonMobil, Chesapeake Energy and EOG Resources. Only four of the companies in the study saw decreases in their combined exploration and development spending in 2010.
This year’s study finds that in 2010 the industry recovered significantly from the economic downturn in 2008-09, benefiting from new shale discoveries and technology advances, higher commodity prices and price stability. With strong revenue and net income gains in 2010, the companies examined invested heavily to develop supplies to meet expected demand growth from economic recovery. With an 11% increase in oil reserves and a 12% increase in gas reserves, the industry is well- positioned to meet future demand.
Comments