Long-Term Outlook for Gas Remains Bullish

Despite the shift by producers towards oil-focused drilling away from natural gas, the long-term outlook for U.S. natural gas demand remains bullish as U.S. nuclear power and coal plants are retired and gas-fired electricity use rises over the next few years, said Pearce Hammond, director of institutional research at Simmons & Co. International, at Platts' sixth annual Oil & Gas Shale Developer conference in Houston this week.

The anticipated retirement of nuclear power plants could potentially add 1 Bcf/d of gas demand by 2020, and the expected retirement through 2020 of 50-60 gigawatts of U.S. coal generation assets could add 4 Bcf/d of additional U.S. gas demand. LNG exports from the U.S. could add an additional 2 Bcf/d of U.S. gas demand, Hammond said.
Increased future use of natural gas vehicles in the U.S. could also create additional 1 Bcf/d of demand for U.S. gas, and gradual growth in industrial demand could add another 2 Bcf/d.

While the U.S. has lost ground to Asia in terms of industrial base, the U.S. has the demographic advantage versus China, whose population is aging and growth limited by the nation's one child policy. Manufacturing costs also have begun rising in China, along with wage rates, and the availability of cheap energy resources at home has prompted some companies to bring manufacturing operations back to the U.S.

U.S. gas demand for 2011 is estimated at 67 Bcf/d, up from 66 Bcf/d in 2010, but less than U.S. supply estimate of 68.4 Bcf/d. Still, the supply overhang estimate is less than previous estimates, thanks in part to cold weather earlier this year which boosted gas demand for heat generation, Hammond said.

Given high oil prices, the Eagle Ford oil shale play in South Texas and the Permian Basin in West Texas and eastern New Mexico remain hot spots for drilling activity. However, activity in the Marcellus shale gas play continues to hold up despite the capital flow shift from gas into liquids.

Unconventional natural gas, particularly shale gas, will make an important contribution to future U.S. energy supply and carbon dioxide emission-reduction efforts, according to The Future of Natural Gas, the fourth in a series of MIT multidisciplinary reports examining various energy sources and their role in meeting future demand.

Demand for natural gas, which burns cleanly and efficiently with very few non-carbon emissions, will likely grow in the U.S. and worldwide for use in power generation, industrial, commercial and residential sectors due to its abundant availability, utility and low cost compared to other energy resources. Gas can play a major role in reducing greenhouse gas reduction, and "play a critical role as a bridge to a low-carbon future," according to the MIT report, which was released earlier this month.

The ample domestic supply of gas has stimulated interest in its use in transportation, driven by the oil-gas price spread and opportunity to lessen oil dependence in favor of domestically supplied fuel, including natural gas-derived liquid fuels with modest changes in vehicle and/or infrastructure requirements and reduce carbon dioxide emissions in direct of gas.

Compressed natural gas (CNG) offers a significant opportunity in U.S. heavy-duty vehicles used for short-range operation, such as buses and garbage trucks, where payback times are around three years or less and infrastructure issues do not impede development. However, for lighter passenger vehicles, even at 2010 oil-gas price differentials, high incremental costs of CNG vehicles lead to long pay back times for the average driver.

Payback periods could be reduced significantly if the cost of conversion from gas to CNG could be reduced to levels experienced in other parts of the world such as Europe.

The current supply outlook for gas will contribute to greater competitiveness of U.S. manufacturing, while the use of more efficient technologies could offset demand increases and provide cost-effective compliance with emerging environmental requirements.

The growing global interest in developing shale gas resources presents the U.S. energy industry with an opportunity to only build up a supply chain of exports for rigs and equipment, and an opportunity to support international allies, Melanie Kenderdine, executive director of the MIT Energy Initiative, told conference attendees. Providing aid in developing shale gas resources in southern South America can help counterbalance against the Chavez regime in Venezuela or help stabilize economies and governments in Africa and the Middle East.