How booming US natural gas exports could affect power utilities and consumers
The US is ramping up gas exports in a hurry, but analysts say increased production will likely keep costs to generators relatively stable
Volumes of liquefied natural gas exported from the Sabine Pass terminal in Louisiana have been setting new records in recent months — not just a sign of abundant supply and international demand, but also a reminder how quickly market conditions can shift.
It was only about a decade ago that Sabine Pass, owned by Cheniere Energy, was designed to import natural gas. Commodity prices had been high for years, and developers were looking to incoming cargo ships to meet demand. But then shale gas — enabled by advances in fracking and horizontal drilling — became a reality, supply flooded the market and the value of import capacity fell to nothing.
Since then, roughly 2007, the same problem that befell the first run of LNG terminals has helped revive them. Cheap fracked gas obliterated the need for imports, but just as quickly created an opportunity for exports. Flows were reversed, and now projects first floated in 2001 are starting to make money.
In December, Sabine Pass shipped out 12 cargoes holding an estimated 42.8 billion cubic feet (Bcf) of gas, according to the U.S. Energy Information Administration — close to the facility's capacity, the agency noted. The first two "trains," which are online now, have a nameplate capacity of 1.4 Bcf/d.
But all total Sabine Pass will expand to six trains. And while it is the first terminal liquefying and exporting gas, it certainly wont be the last.
A study commissioned by the Natural Gas Supply Association and completed by Energy Ventures Analysis finds four other projects are under construction and by 2020 total U.S. LNG export capacity will reach 8.6 Bcf/d.
There may be a pause in constructed capacity as the international market sorts through a temporary oversupply, but EVA said it expects in the long-term "a second wave" of projects will move forward after 2023. And by 2030, export capacity is expected to reach 15.5 Bcf/d, "establishing the United States as the world’s largest LNG exporter."
"It's becoming an ever-more dynamic market," said Adam Forni, a senior research analyst at Navigant focused on distributed gas generation.
In the near-term, natural gas exports remain a small part of the United States energy picture, and price impacts are expected to be minimal for both to gas and electricity. But as more export capacity comes online, some impacts are inevitable.
While it might not all be utilized, 15.5 Bcf/day of natural gas export capacity is a significant chunk of the 2015 market. That amount of gas would be capable of producing 1.5 million MWh/day, and represents more than 20% of daily gas consumption according to the U.S. Energy Information Administration.
"In general the low prices seen, the extremely cheap gas in 2016, will probably be the lowest for some time, and the prices of electricity will respond in an increasing fashion to natural gas prices," said Forni.
But even as exports ramp up, experts say the actual price impacts will remain muted. Gas prices have traded at historic lows in the last year, but markets are cyclical and in response producers have backed off on connecting wells to pipelines. While fluctuations in prices will occur, ample shale resources should allow producers to produce more gas as needed.
"We believe the global markets have room for additional exports from North American market," said Denny Yeung, principal consultant for Black & Veatch Management Consulting. But he also said that domestic power generation demand for gas is expected to rise in the next two to three years, helping put upward pressure on prices. Production capability in the Marcellus, Eagle and Permian shale basins will help moderate prices.
Forni echoed those sentiments, saying rapid production response capabilities will be a "key thing likely to hold prices relatively steady."
"Drillers and exploration companies can react much more quickly to signals in the market," he said. "There will be an upward impact but the ease of pumping natural gas will likely level that out and we'll see slight increases in price over the next five years."
The EIA predicts natural gas production to average 73.7 Bcf/d in 2017, a 1.3 Bcf/d increase over 2016. Additional gas generation and exports will both play a role in increasing prices, the agency said. Henry Hub spot prices are expected to rise from $3.43/MMBtu this year to $3.70/MMBtu in 2018.
"Since the Sabine Pass terminal first came into service in 2016, we were in a market where there was a fairly sizeable supply overhang. You couldn't really tell what the price effect was," said Yeung. The terminal exports between 1 and 2 Bcf/d, a "drop in the bucket," he said.
Even with more terminals coming online, "ultimately we believe there will be sufficient supply and production capabilities to keep prices at moderate levels," Yeung said. B&V is expecting an average gas price of $3.50 to $4.50/MMBtu over the next few years, he said.
He also said growing power demand in Mexico could drive additional exports. The United States currently exports about 1 Bcf/d to Mexico, but that could grow to 8 Bcf/day in the next several years, Yeung said. Some tightness in the gas market can be made up with other fuels, as well. "I do think there's a role in the market for coal," said Yeung, predicting it will fluctuate between 30% and 35% of the United States generation mix for the next two to three years
Second wave of export capacity anticipated
EVA's analysis shows exports could reach about 13.2 Bcf/d by 2030, not quite utilizing all of the available capacity.
A report contracted by the U.S. Department of Energy's Office of Fossil Energy concluded in 2015 that increasing LNG exports would lead to "Henry Hub prices are higher than they would otherwise be."
"Producers increasingly exploit reserves with higher extraction costs. Higher natural gas prices will erode consumers’ purchasing power both directly and indirectly as the impact of higher domestic natural gas prices filters through the supply chains of other sectors causing the prices of other goods and services to rise," the report found. "This will negatively impact consumption with the energy‐intensive sectors being most affected."
Greater gas exports means a stronger reliance on storage, as well as the need for production increases. But Yeung said gas producers have ample spare capacity for now. And EIA is predicting dry gas production to rise from 72 Bcf in 2016 to almost 78 Bcf in 2018.
Black & Veatch believes that LNG exports could reach 10 Bcf/d by 2030, but Yeung said there are sufficient long-term gas supplies to keep prices in the $5/MMBtu to $7/MMBtu range, while "still serving growth from LNG exports, power generation demand and pipeline exports to Mexico in this time frame."
He also said products are ramping up production now. "We've seen over the last six months, back to mid-late 2016, we have seen some activity, growth in drill rig activity," Yeung said. "Overall there is a rise in drilling activity, and we believe this growth will start to bring more production online."
Baker Hughes, an oilfield data company, says the number of rigs drilling for or developing gas in the United States has shown a sharp uptick in the last year. There are now 149 gas rigs, compared with 102 this time last year.
The long-term trendline for gas prices is certainly higher, but EVA Principal Michael Schaal said the United States has sufficient resources — both in terms of gas and a growing base of renewables — to maintain stable power prices.
"In the long term, the United States has a very robust natural gas resource base. It has proven to be able to provide gas at a significantly lower cost than what had previously been thought as late as 2010," said Schaal. "And it seems to be getting better every year."
The bigger issue, he said, is developing infrastructure to process and bring it to market.
Looking out to 2035, EVA predicts Henry Hub gas prices at $7.50/MMBtu. While there will be some natural upwards pressure on electricity markets, Schaal said growing renewable resources would also help mitigate increases, as well as lackluster load growth due to energy efficiency.
"Definitely on a regional basis in ths country, renewables are showing they have an upper hand on natural gas capacity," Schaal said. "Renewables are supply an increasing amount of generation current today and in future years. That is one of the reasons why the price impacts we expect are somewhat mitigated, particularly in outer years, because we have other sources of power that are up and coming and gaining market share."
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