POWER January 2013 - 43

2013 INDUSTRY FORECAST
2. Prices expected to rise. Natural gas demand may remain flat for 2013, but price
forecasts agree (the blue and green lines bracket the 95% confidence zone) that the price
is moving up. The only question is how fast. Source: EIA, " Short-Term Energy Outlook, "
November 2012.
Historical spot price
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8
6
4
2
Jan.-2011
Jul.-2011
Jan.-2012
Heating demand as a result of more normal
winter weather, combined with growth in
industrial consumption, should make up
for the decreased power burn (Figure 2).
" Between early, thus far, sustained colder-than-normal
temperatures and nuclear
outrages and maintenance, " gas market
analyst Jay Levine told POWER in November,
" natural gas continues to remain buoyant
and stronger than many anticipated. "
The " fracking " rush, like most booms,
badly overshot its target in 2011-2012,
leaving thousands of drilled but uncompleted
gas wells waiting for a resurgence
in prices. Gas at $2/MMBtu is a moneyloser
for the drillers, but should prices begin
edging above $4/MMBtu, returns on
investment become attractive enough that
it is likely some of these wells will return
to production.
In addition, the shale oil boom continues
unabated, with associated gas accounting
for an increasing percentage of
the current production. While a shocking
amount of this gas is being flared because
of a lack of gathering infrastructure-in
North Dakota, almost 30% of it was flared
last year-this will change as several key
pipelines in shale fields come online. Likewise,
continued strong demand for natural
gas liquids has kept production levels high
despite a big drop in the gas rig count.
Finally, despite the record power burn,
gas inventories remain at record levels,
having ended the 2012 injection season
just below 4,000 Bcf-an unthinkable
amount not so long ago.
Political Uncertainties Remain
The first political uncertainty is a series
of proposed rules on hydraulic fracturing
and gas production. In April, the Environmental
Protection Agency (EPA) issued its
January 2013 | POWER
Jul.-2012
STEO forecast price
95% NYMEX futures upper confidence interval
NYMEX futures price
95% NYMEX futures lower confidence interval
Projections
Waiting for Demand Growth
Another big uncertainty is demand for
electricity generation. In 2012, shares of
total U.S. electricity generation averaged
30.6% for gas and 37.2% for coal. Higher
gas prices-while coal prices remain
flat-are projected by the EIA to reset
that breakdown to more traditional levels
in 2013, back to 27.2% for gas and 40.1%
for coal.
But there are signs that any such reJan.-2013
Jul.-2013
final
rule on emissions from fracked wells.
While the rule is fairly clear, the level of
enforcement, and the commensurate costs,
are not. Estimates have ranged from essentially
negligible to hundreds of thousands
of dollars per well. If the higher estimates
prove correct, this could put a brake on future
production.
Another set of rules covering the entire
fracking process on federal lands is currently
pending from the Bureau of Land
Management. With the final form uncertain,
the impact is as well, but these too
are likely to increase production costs to
some degree.
The other major political uncertainty
concerns liquefied natural gas (LNG)
exports. In mid-2012, shortly after Cheniere's
Sabine Pass export project received
Department of Energy (DOE) approval,
the Obama administration put all other
applications on hold until after the November
elections, ostensibly to allow further
study of the effects on the domestic
energy market.
LNG exports are facing substantial opposition
from a variety of quarters, creating
some odd bedfellows: Environmental
groups such as the Sierra Club are joining
forces with petrochemical companies and
several natural gas advocacy groups in an
attempt to block exports.
With upwards of 20 Bcf/day of proposed
projects currently awaiting DOE approval
or in the process of application, a
few observers have taken a " sky is falling "
view of the market, seeing huge amounts
of domestic gas heading overseas. More
levelheaded analysts have noted that, no
matter the political outcome, the U.S. is
unlikely to see much beyond 6 Bcf/day of
exports, particularly given the cost to build
LNG export facilities.
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bound is likely to be temporary. With estimates
of impending coal plant retirements
ranging anywhere from 40 GW to over 80
GW by 2015, the ability of the coal fleet to
shoulder significant price-induced gas-tocoal
switching may be limited. This range
of retirements equates to around 4 to 8
Bcf/day in gas demand.
Spurred by lower prices, the need for
greater dispatch flexibility, and favorable
regulatory treatment, strong development
of gas-fired generation is likely to continue.
Meanwhile, even advanced " clean
coal " plants face significant developmental
roadblocks.
Finally, the pace of the current economic
recovery remains unclear. While the U.S.
is seeing modest growth, there are clouds
over Europe and Asia. Another downturn
would limit electricity demand and likely
keep gas power burn below 2012 levels for
some time. Stronger growth, on the other
hand, may exert upward pressure on gas
prices.
Scenario Options for 2013
The first possible scenario takes the
Obama administration at its " all-of-theabove "
word and assumes the regulatory
impact on gas remains light, while the
U.S. economy continues its slow recovery.
In this case, the large supply overhang is
able to meet increased demand outside
the power sector, keeping prices steady at
around $3.50 to $4.00, in line with current
projections. In the event gas demand
exceeds projections, producers will have
sufficient time to resume exploration.
If, on the other hand, President Obama's
reelection heralds new regulatory pressure
on fossil fuels-both gas and coal-gas
production may be handicapped just as
significant coal generation begins to go
offline. This would mean higher-thanexpected
demand, possibly more than the
current supply overhang can meet, leading
to short-term supply constraints and consequent
price spikes. ■
-Thomas W. Overton, JD is POWER's
gas technology editor. Follow Tom on
Twitter @thomas_overton.
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$/MMBtu
http://www.powermag.com
POWER January 2013

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