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Natural gas may be hitting a wall

By James Osborne
March 4, 2017 at 10:40 p.m.


WASHINGTON — The seemingly insatiable appetite for natural gas at the nation's power plants could be on the verge of an abrupt hiatus.

Analysts from around the energy sector are forecasting gas demand from the U.S. power sector will at best flat-line and possibly fall off significantly over the next five years as federal energy policies and rapidly changing market dynamics collide.

A loss of business from the gas industry's largest domestic customer would come as gas-fired plants come under increasing competition from wind and solar farms — and to a lesser extent coal as President Donald Trump promises to support that industry.

"You have wind turbines getting more efficient. And a lot of solar is coming online," said Prajit Ghosh, head of research for North America power and renewables at the energy research firm Wood Mackenzie. "The only way gas markets can increase is by displacing coal and nuclear."

For Texas natural gas producers, these trends mean they'll need to focus on new markets, both foreign and domestic. Global demand for liquefied natural gas is growing — the Houston LNG exporter Cheniere Energy on Tuesday reported its first quarterly profit after beginning shipments about a year ago from its Sabine Pass terminal. The appetite among U.S. chemical makers for natural gas, a feedstock, is also increasing, analysts said.

Growing demand in these markets is expected to lift prices off of last year's lows, pressuring generators that fuel plants with natural gas to shift toward other energy sources. Ghosh estimated that natural gas prices could rise more than 40 percent this year to as high as $3.70 per million British thermal units, up from an average of $2.62 in 2016. At that point, he said, "coal plants will start competing with gas plants again."

How such a price increase would affect gas demand in the power markets is debatable. But the Energy Department earlier this year predicted that the amount of electricity generated from natural gas in the U.S. will fall 17 percent over the next five years and not return to current levels again until the late 2020s.

Over the same five-year period, renewable sources are projected to grow more than 50 percent.

The possibility of a nose dive in demand from the power sector is enough to get the attention of executives in the natural gas industry, who rely on power plants for roughly one-third of their business.

Speaking in Washington last month, Alan S. Armstrong, chief executive Williams Cos., worked to allay investor concerns around projections that the Oklahoma company's gas pipelines would see virtually no growth in demand from the power sector.

"It's the assumption of a gas price that would put other generation sources in front of it," he said in a speech at the Southern States Energy Board. "That's not a bad thing because there's plenty of load pulling into LNG and into ethylene manufacturing, methanol, fertilizers."

Whether LNG and chemicals will, in the short term, be enough to cover losses in the power sector remains to be seen. The Energy Department, for instance, forecasts that overall natural gas demand in the U.S. will slide 2 percent over the next five years before rebounding and increasing 6 percent from current levels by 2030.

That would be a marked turnaround from the past decade, when a flood of cheap gas drawn from shale formations in Texas, Pennsylvania and other states drove up gas consumption by 24 percent.

During that period, however, the demand for power went stagnant, the result of federal mandates on increasingly efficient light bulbs and appliances and changing consumer habits, Ghosh said.

Adding to the uncertainty is the fate of ex-President Barack Obama's Clean Power Plan, which would sharply cut carbon emissions from power plants. That was expected to provide a significant boost for natural gas, which emits less carbon than coal.

Trump has promised to overturn those policies, which are still awaiting a ruling from D.C. Circuit Court of Appeals after a challenge by the coal industry and a group of states, including Texas.

What's more, gas-fired power plants themselves continue to get more and more efficient. Scribbling out a calculation in his office, Thad Huetteman, who heads an electricity analysis group at the Energy Department, figured that by 2023 the average gas-fired plant will need 5 percent less fuel than it does now to produce the same amount of electricity.

All of this has added to a level of uncertainty not known in the gas sector for a decade.

At the Southern States Energy Board meeting last week, Duane Highley, CEO of the Arkansas Electric Cooperative Corp., which serves half a million customers, proclaimed that falling prices for wind turbines and solar panels could mean the age of building large fossil fuel plants was near its end.

"We're in a post-coal world, and we're almost in a post-gas world," he said.

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