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Anticipated gas decline may lead to 2020 shortfall

29 Apr 2016 22:10 (+01:00 GMT)
Anticipated gas decline may lead to 2020 shortfall

Houston, 29 April (Argus) — Soaring US natural gas output from shale formations has pushed prices to the lowest levels in nearly two decades, forcing companies to slash spending and idle drilling rigs.

A long-anticipated decline in US production expected to begin this year could leave some US regions undersupplied by 2020 as gas demand swells for electric generation, industrial use, pipeline exports to Mexico and LNG exports, experts said at the Argus US Natural Gas Markets conference in Houston.

US gas production should decline as long as crude oil remains below $50/bl and gas prices below $2.75/mmBtu, said Bernadette Johnson, managing partner of Ponderosa Advisors.

Ponderosa projects gas demand will grow by 3.2 Bcf/d (91mn m³/d) by 2020 from the average seen from 2012 to 2015 to supply an expanding US fleet of gas-fired power plants. Industrial demand spurred by low gas prices should boost demand by another 3.3 Bcf/d while Mexico will likely import an additional 2.5 Bcf/d of US gas.

LNG exports, a harder number to forecast, could lead to an increase of 6.9 Bcf/d in gas demand by 2020, based on successful completion of five planned LNG export facilities.

But Johnson said it may be unrealistic to expect US LNG facilities to capture 20pc of the total LNG market of 33 Bcf/d.

Ponderosa expects average daily gas demand to reach 85.6 Bcf/d in 2020 while production may only reach 80 Bcf/d.

Gas from the Marcellus and Utica formations in the US northeast will likely fill much of the expected supply shortfall, but only if new pipeline infrastructure is able to be built.

Likely pipeline delays mean that northeast gas will not be able to fill the shortfall, said Andrew Bradford, chief executive of BTU Analytics, who projects a shortfall of 4.4 Bcf/d by 2021.

Pipeline projects in the northeast are facing regulatory hurdles. The New York Department of Environmental Conservation's 22 April denial of a water quality permit for the Constitution pipeline last week was a major setback to the proposed 628mn cf/d capacity project.

The 1 Bcf/d PennEast pipeline has been delayed by a year because of federal regulators scheduled a later approval date than originally expected.

The gas market has been lulled into thinking that new demand will be met by the thousands of uncompleted wells and new wells in what is considered less-attractive acreage in the Marcellus and Utica areas. "The northeast can't grow enough," Bradford said.

New drilling activity in the Haynesville and Cotton Valley fields could compete to serve growing demand in the US southeast, he said, as many wells can be drilled there at a break-even gas price below $3mm/Btu.

Some producers may not be able to respond quickly even if oil and gas prices rise because of lingering heavy debt. "Banks will want to get paid first," Bradford said.

Higher gas prices will boost returns significantly for producers in the northeast Pennsylvania region of the Marcellus, followed by the Cotton Valley, southwest Marcellus region, the Haynesville, Fayetteville and eastern area of the Eagle Ford formation, according to BTU Analytics.

A jump in crude prices would drive higher returns across the Eagle Ford, the Denver Julesburg basin, the Delaware and Midland basins in the Permian, the Bakken and Cotton Valley formations, according to Bradford.

In the west, rising output from the Denver Julesburg and Bakken regions has bolstered recent production, but overall production will likely be flat to declining going forward as abundant Marcellus gas moves westward, said Brian Pieri, commercial marketing manager for Linn Energy.

California and Arizona utilities may be the most concerned about a lack of production growth from the Rocky Mountain region as Mexico's appetite for US gas increases. "Mexico is starting to consume a lot of gas that was once exported to California," Pieri said.

US onshore production has soared since 2012, rising by 16pc to 74.36 Bcf/d. While production growth has slowed dramatically, the US Energy Information Agency still projects a 1.5pc increase in output this year.