In 2009, unconventional shale gas emerged as the dominant driver in North American natural gas markets. Rapid increases in shale gas production and shale-driven upward revisions to the U.S....
Gas Market Outlook
Why America’s bridge fuel faces a road block.
American gas producers is doubled, however, because steady declines in conventional gas production also are expected.
The dramatic shift toward shale gas production, ongoing permitting and other regulatory issues, and the uncertain outlook for gas demand growth, have combined to squash expectations for the Alaskan Natural Gas Line and Mackenzie Delta pipeline. These Arctic frontier mega-pipeline projects probably won’t be able to move forward as long as renewables are expanding at their current rate and coal-fired power generation remains viable.
The dramatic emergence of shale gas in the United States has pushed LNG out of focus. However, the global LNG industry continues to expand with approximately 6.3 Bcfd of new liquefaction capacity started up in 2009, and another 4 Bcfd being brought into commercial service this year. While this growth results largely from a wave of new liquefaction projects reaching completion that were planned in response to increases in world natural gas prices several years ago, the global LNG industry likely will see additional waves of expansion after the current down cycle ends.
Several factors likely will result in U.S. LNG imports growing over time—although perhaps not in a way that easily can be planned around. A key driver is the seasonal demand profile in European and Asian markets and vastly smaller underground gas storage capability in these markets. The seasonal demand and lack of storage will result in growing spot LNG imports into the United States. In essence, the United States is expected to play a balancing role in global LNG markets. The result could be more seasonal volatility in U.S. gas prices as a result of events in global gas markets leading to sudden surges or slumps in spot cargoes.
Green Wild Cards
Despite the emergence of shale gas, the outlook for the natural gas industry continues to be heavily dependent on the power sector. While natural gas still might be the bridge fuel, the on-ramp might be a decade away. The 2020 to 2030 time period might become another dash for gas with construction of new natural gas-fired power generation capacity rivaling the merchant boom period. However, this outcome depends on growth in renewables slowing once a 15-percent penetration level is reached and coal-fired power generation coming under pressure as carbon restrictions begin to ramp up.
For the next several years, shale gas producers likely will find they face brutal competition for market share. Assuming the power sector’s focus remains on renewables for the next 10 years, natural gas prices likely will be increasingly volatile but within a fairly narrow range ($5 to $8/MMBtu), with the soft floor set by displacement of higher cost coal-fired power plants and the ceiling based on the marginal cost of conventional natural gas production. After 2020, natural gas prices likely will increase steadily over time with real price escalation driven by increasing demand pressure from the power generation sector.
1. Shale gas wells typically have decline rates upwards of 60 percent after the first year of production, which reflects the high level of stimulation delivered by the hydraulic fracturing process.