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Gas Market Outlook

Why America’s bridge fuel faces a road block.

Fortnightly Magazine - April 2010

horizontal rig counts are down significantly less than other rig types and have begun to increase over the last several months suggesting that producers will continue to pursue shale development despite the fairly low price environment.

After months of holding steady despite falling prices and much lower rig counts, U.S. lower 48 natural gas production has shown some initial signs of decline. With fewer new wells being added, gas production could drop significantly in 2010, partly because of the shift to shale gas production and shale well’s typical high initial production decline rates. 1 In addition, many areas of relatively expensive conventional production—such as the offshore Gulf of Mexico—are continuing to decline.

Liquefied natural gas (LNG) imports increased slightly during the summer averaging approximately 1.5 Bcfd compared to 1 Bcfd for most of 2008. This winter, U.S. LNG imports increased, reflecting additional deliveries into the Northeast U.S. in part due to: new liquefaction trains coming on-line; low global natural gas demand; and new import terminals coming on-line in Eastern Canada and the Northeast U.S. (see Figure 4) . Most Gulf Coast LNG cargoes arrive under short-term or spot contracts. In general, Gulf Coast LNG imports have been the highest during the spring and fall when seasonal gas demand is lowest in other parts of the world. East Coast LNG cargoes include a portion of the deliveries under long-term contracts and in general, the terminals in the Northeast are expected to have higher utilization rates than those in the Gulf Coast. 2 While LNG imports are starting to ramp up, Canadian gas delivered via pipeline continues to be the largest source of U.S. natural gas imports. While Canada was a growing source of natural gas supply to the U.S. market for many years, U.S. net pipeline imports were down approximately 1 Bcfd in 2009 compared to 2008, reflecting growing U.S. shale gas production, declining Canadian natural gas production, and increasing Canadian natural gas demand.

Anemic Decade

Natural gas demand growth from the power generation sector likely will accelerate over the long-term driven by carbon restrictions and other environmental pressures that eventually will encourage the construction of new natural gas-fired power plant capacity. Over the next 10 years; however, natural gas demand growth is expected to be anemic.

The predicted slow growth over the next ten years should occur at least in part due to the significant growth in natural gas-fired power generation capacity that occurred in the early part of the 2000s, which created an over-build of capacity in some U.S. power markets. Natural gas-fired power generation capacity essentially doubled from 1998 to 2004, from approximately 200 GW to approximately 400 GW (see Figure 5) . Since 2004, natural gas-fired power generation capacity has continued to expand but at a much lower rate.

Since 1995, coal-fired power generation capacity essentially has been flat—as has nuclear and hydro-electric generation capacity. Oil-fired capacity has declined by approximately 10 GW. Renewable capacity began to grow in the last decade from a very small base, and in 2008 and 2009 increased at a rate of 10 GW/year.