The other day I heard someone make a US natural gas demand call for a 100 plus Bcf/d by 2021. This is a jaw-dropping forecast considering the US natural gas market is at about 72 Bcf/d today. An incremental 28 Bcf/d – a bigger volume than the entire Marcellus & Utica combined. The speaker achieved his goal and got my attention if nothing else (and by the way BTU Analytics’ natural gas demand forecast through 2021 is more conservative at an incremental 10-15 Bcf/d by 2021). However, let’s consider this aggressive demand forecast and the reality in order to achieve 100 plus Bcf/d. To start with, every switching opportunity for gas in North America has to switch at maximum capacity – Mexico exports, LNG, industrial demand, power burn to name a few. And if North America goes all in on gas, doesn’t this set up a start of the natural gas demand cycle all over again (remember the power plant demand build out driven by Enron, Duke, El Paso and Dynegy of the late 1990s/early 2000s which pushed Henry Hub moving from $2 range in 1999-2000 spiking to over $10 in January 2001)?
In order to reach 100 plus Bcf/d demand, on the supply side, the resource is there, albeit the North American gas market would need to rally to higher price levels than where they are today to achieve the necessary production response.
On the demand side, again every gas opportunity has to go at maximum capacity. Mexico exports have an incremental 8 Bcf/d of pipe capacity being built – fill it all 24-7-365. LNG has an incremental 7 Bcf/d of permitted and under construction terminal capacity – fill it all. That gets us 15 Bcf/d. Industrial demand and res/com will have to add a few Bcf here and there. The rest of the 13 Bcf/d gap, to get to the 100 Bcf/d demand forecast, would fall on power burn.
The good news is power burn has been setting records driven by low natural gas prices in 2015 and 2016 and coal plant closures – see chart above. In addition, in looking at new gas plant meters off interstate pipelines, we can see that new power plant meters (a proxy for new build gas power plants) accounted for an incremental 1.4 Bcf/d of demand this summer – see chart below.
In looking at the PJM natural gas-fired generation queue there is no shortage of proposed projects and back of the envelope calculations suggest there is the potential for 8 plus Bcf/d of gas burn (assuming all plants get built and run at 80% utilization).
Another supportive trend in favor of natural gas demand is the potential acceleration of nuclear plant closures. In the last 4 years over 3,000 MW of nuclear capacity has shut down in California, Vermont and Wisconsin. There are another 14 nuclear plants that have been identified as either imminently closing or at a risk of closing which represents over 15,000 MW of nuclear capacity. Ironically, a large proportion of these potential nuclear plant closures are located where you can’t build new natural gas infrastructure – NY ISO, New England ISO and California ISO.
All of this power burn related activity would close the 13 Bcf/d gap to achieve the potential 100 plus Bcf/d demand forecast by 2021. However, North American going ‘all gas’ wherever possible potentially sets up the next cycle in natural gas markets. Remember the early 2000s. As Mark Twain said – ‘history doesn’t repeat itself, but it often rhymes’. Subscribe to BTU Analytics 5-year view on Northeast and Henry Hub Gas Fundamentals and basis forecasts – BTU Analytics Northeast Gas Quarterly.
