Moody’s: No end in sight for low natural gas prices, power landscape to be changed permanently

The U.S. energy sector is undergoing a permanent change as natural gas prices will remain low for the foreseeable future, with significant implications over the next decade for the power, pipeline, coal and rail industries, says a new report by Moody’s Investors Service.

“Moody’s believes that low natural gas prices — currently at a 10-year trough — will continue well beyond 2013. This is creating a fundamental shift in North America’s energy infrastructure, as low prices continue to erode margins for unregulated power companies such as Exelon, First Energy and PPL,” said Jim Hempstead, a Moody’s Senior Vice President and author of the report.

“Coal will find it increasingly difficult to compete with gas as a power source over the next decade and we expect miners to continue their shift toward non-domestic revenue opportunities,” added Hempstead.

Moody’s says that coal-fired power plant retirements will cut the power sector’s demand for coal by up to 10% between 2012 and 2020, and as coal consumption drops by roughly 100 million tons the industry will become increasingly focused on exports.

The report highlights Peabody Energy, Arch, Consol and Cloud Peak Energy resources as industry players that are already securing additional port capacity to reach export markets.

The drop in domestic coal demand, one of the US railroad industry’s most profitable segments, will lead to long-term changes in that sector too, says Moody’s. Higher exports from western coal producers will increase volumes for Union Pacific and Burlington Northern Santa Fe. Illinois Basin and met coal production in the east will increasingly benefit CSX and Norfolk Southern.

The report also notes that new natural gas pipelines serving the shale production regions will create new competitive risks for the existing interstate pipeline network. Companies with assets near the production basins, such as NiSource and Dominion Resources, will benefit, but disappearing arbitrage opportunities will hurt the marketing arms of such utilities as AGL Resources and Vectren.