The POWER Interview: Keeping the Flame for Natural Gas

The post The POWER Interview: Keeping the Flame for Natural Gas appeared first on POWER Magazine.

The crash in global oil prices, though a challenge for cash-strapped drillers and U.S. exploration and production (E&P) companies, may provide an opportunity to move natural gas prices higher. Analysts in recent days have said higher gas prices could come as soon as next winter-some predict prices could more than double from recent lows of about $1.55/MMBtu, the lowest level in at least the past 20 years.

The coronavirus pandemic sent oil prices crashing as demand cratered. Natural gas prices slumped as warmer winter weather reduced U.S. gas demand for heating. Production continued to outpace demand, prompting a response from E&P companies, who in March announced across-the-board spending cuts.

Those companies adjusted their capital expenditure (CAPEX) outlooks and production guidance, including reducing drilling and idling rigs in U.S. shale plays.

Analysts from Tudor, Pickering, Holt & Co. (TPH) in an April 13 note said the reduced supply of oil changes the outlook for natural gas, noting that "in our view, as the oil price collapse is set to drive 5.5 Bcf/d of supply declines" from the end of 2019 to the end of 2020, "putting the market 4-5 Bcf/d undersupplied heading into 2021."

The TPH analysts said that with natural gas at $3MMBtu, "we expect gas producers to continue to show restraint, with just 1 Bcf/d of gas-directed growth expected, meaning demand destruction may ultimately be the required path to a balanced market."

Enverus Energy, a data analytics company, also expects U.S. natural gas production will decline over the next several months. Enverus in its recent "The Dark Side of the Boom" report said gas output will drop through the rest of 2020, with the company's analysts saying they expect gas production will "decline by over 6 Bcfd by December 2020 compared to 2019. This will cause the gas market to go from being long during the summer months to being very short by the winter 2020-21."

Enverus forecasts that natural gas prices will exceed $4/MMBtu and could reach $4.50/MMBtu as early as next winter. "Longer term, natural gas prices are expected to average $2.80/MMBtu; this level allows gas production growth to meet expected demand gains," Enverus said in the report.

The U.S. Energy Information Administration, meanwhile, in its April Short-Term Energy Outlook said it too expects drilling activity to slow.

"In addition to this model-based drop, EIA assumes a further 15% reduction in activity on average in the second quarter of 2020 and a 12% reduction in the third quarter of 2020 to account for the unprecedented effects of COVID-19 on the level of drilling activity as many producers have already announced plans to reduce capital spending and drilling levels," the EIA said.

Farhan Mujib of KBR

And there's another market force that could work in gas' favor. The coronavirus' disruption of supply chains for the renewable energy industry, along with labor shortages, is likely to slow the growth of renewable energy projects, including solar, wind, and energy storage. That could increase the reliance on natural gas for power generation, keeping more gas-fired peaker plants in operation.
The advent of power-to-gas (PtG) systems also could be a boon for natural gas. PtG is a process in which hydrogen and carbon dioxide from hydrocarbons such as natural gas are gathered separately, then combined through methanation to produce synthetic natural gas, a more carbon-neutral form of gas.

Wirtsili, the Finnish global energy services company, recently released a white paper that said California could reach its clean energy goals-currently 60% renewable energy by 2030, 100% carbon-neutral by 2045-more rapidly, and at less cost, through power-to-gas.

Rob McBride of Enverus Energy

Rob McBride, senior director of strategy and analytics at Colorado-based Enverus, in a recent interview with POWER said natural gas prices likely are headed higher, though the uptick is probably months away, owing to the demand destruction from the coronavirus pandemic, and the time it will take to work off the excess supply of natural gas. Farhan Mujib, president of Energy Services-Delivery for KBR, a Houston, Texas-based engineering, consulting, and construction firm, also spoke with POWER about what the future holds for natural gas.

POWER: Is there any chance for natural gas prices to rebound from their sub-$2/MMBtu lows?

Mujib: It is quite likely that natural gas prices will stay low in 2020. However, as supply-demand balance and more demand for LNG grows in China, India and Europe, it is expected to increase but still remain sub $3/MMBtu for the medium term.

McBride: I am inclined to agree, particularly for 2020. Some forecasters [EIA in particular] are already calling for a decline in U.S. dry gas production in 2020. However, our tracking of E&P company guidance suggests that the response will not be that quick. While CAPEX budgets continue to decline, continually improving efficiencies as well as hedges already in place lead us to believe production in 2020 will remain flat to slightly increased. So by no means the explosive growth rates of the past two years, but not in decline yet.

POWER: A Raymond James survey of E&P executives said U.S. natural gas prices likely will not top $2.50/MMBtu in 2020. Do you agree, and if so, why? If you don't agree, why not?

McBride: If we are right on this it's hard to imagine any price recovery. Inventories in the U.S. and Europe are very high due to a winter that never was, the global LNG market is currently oversupplied, and now consider demand destruction due to COVID-19 concerns. If production were to decline, there may be room for upside in winter 2020/21 so long as winter temperatures return to normal, but we continue to believe production will maintain throughout 2020.

POWER: The current administration is promoting LNG exports. Are those exports now the best market for U.S. natural gas producers?

Mujib: Certainly. The U.S. remains one of the most attractive sources for LNG export due to the abundance of natural gas, stable regulatory requirement [with the exception of tariffs], and its low cost to develop LNG export facilities compared to Australia, Canada, and other developments in Africa. In addition, the proximity to Europe and their curtailment of coal and nuclear-based power generation provides a great market for cheap LNG exports from the U.S.

McBride: Those [LNG exports] and exports to Mexico. There is little reason to believe there are large step increases in domestic demand on the horizon. U.S. demand will grow [in electricity generation and industrial] but not nearly at the rate that U.S. supply is capable of growing. As such, U.S. supply growth needs to find a home abroad. There is plenty of spare capacity on the U.S. side of the border available to ship south.

POWER: What are the expectations for exports to Mexico? And how will LNG exports impact the global gas market?

McBride: As infrastructure continues to develop in Mexico, expect those exports to increase. Additionally, LNG will play a large role in clearing the market, particularly if demand growth expectations from India and China continue as expected. Currently the world is awash in LNG, from the U.S., Australia, and Qatar, which makes it difficult for any additional planned project to reach FID [final investment decision]. It is challenging to secure the long term off-take commitments necessary to finance a new build, however if demand catches up there will be a need to expand export capabilities.

POWER: Fewer new gas-fired power plants are being built in the U.S., and the wave of coal-to-gas conversions has waned. Is there a future for gas-fired generation in the U.S., and if so, where? Is there a future for gas-fired generation in the world, and if so, where?

Mujib: There is, but it will be limited. The next wave of gas-fired combined cycle power plants will be in developing countries like India, Pakistan, Bangladesh, and also countries like China switching from coal to gas and in the Middle East switching from oil to gas.

McBride: There is certainly a future for gas-fired generation both in the U.S. and abroad. There is somewhere close to 20 GW in various stages of construction in the U.S., and another ~20 GW in various stages of regulatory approval. Not surprisingly the majority of these are located in Pennsylvania, Ohio, and Texas, with Florida not far behind. Absent a scalable breakthrough in battery storage, natural gas will continue to provide significant baseload generation in addition to being called on to fill variable gaps in intermittent wind and solar. The same rationale applies globally, particularly in emerging markets such as China and India. Expect to see continued growth in demand for gas " though most agree it may take until 2022 and beyond for demand to catch up with the oversupplied global market.

POWER: Natural gas was considered the bridge fuel from coal to renewables. Is that still the case?

Mujib: For the medium term (10-20 years) that will be the case. However, longer term it will be hydrogen as environmental pressures grows to find greener fuels with zero emissions and zero carbon footprint.

POWER: New projections by the EIA say electricity generated by renewable energy will surpass natural gas generation in 2045. Do you think that's an accurate estimate, or could renewables surpass gas generation before that date?

McBride: Difficult to say but that certainly could be true, and certainly could be earlier. The case for earlier hinges on the fact that predicting technology adoption at the margins is extremely difficult and often happens rapidly. In order to see this form of adoption, however, it would still likely require significant scalable breakthroughs in battery storage technology as well as time to deploy. Otherwise renewables will still find limitations due to intermittency.

Mujib: I think that is overstated. Renewables are still not every economical compared to natural gas. I think renewables will remain around 30-35% until we are able to develop more cost-effective means to mass produce energy from renewables.

-Darrell Proctor is associate editor for POWER (@DarrellProctor1, @POWERmagazine).

The post The POWER Interview: Keeping the Flame for Natural Gas appeared first on POWER Magazine.