EIA says natural gas should stay pretty cheap for quite a while

The U.S. Energy Information Administration said in its Annual Energy Outlook 2015, released on April 14, that natural gas prices should stay low in the near term due to high shale gas output, but then start ticking upward in later years.

Henry Hub natural gas spot prices vary according to assumptions about the availability of domestically produced natural gas resources, overseas demand for U.S. liquefied natural gas (LNG), and trends in domestic consumption, EIA noted. In all cases studied, prices are lower in 2015 than the $3.73/million British thermal units (Btu) average Henry Hub spot price in 2013, and in most cases they are above that level by 2020.

In the AEO2015 Reference case, the Henry Hub spot price is $4.88/million Btu (2013 dollars) in 2020 and $7.85/million Btu in 2040, as increased demand in domestic and international markets requires an increased number of well completions to achieve higher levels of production. In addition, lower cost resources generally are expected to be produced earlier, with more expensive production occurring later in the projection period.

In the High Oil and Gas Resource case, U.S. domestic production from tight oil and natural gas formations is higher than in the Reference case as a result of assumed greater estimated ultimate recovery (EUR) per well, closer well spacing, and greater gains in technological development. Consequently, even with low natural gas prices, total U.S. domestic dry natural gas production grows sufficiently to satisfy higher levels of domestic consumption, as well as higher pipeline and LNG exports.

With the abundance of natural gas produced domestically, the Henry Hub spot price (in 2013 dollars) falls from $3.14/million Btu in 2015 to $3.12/ million Btu in 2020 (36% below the Reference case price) before rising to $4.38/million Btu in 2040 (44% below the Reference case price). The Low and High Oil Price cases assume the same level of resource availability as the Reference case but different world oil prices, which affect the level of overseas demand for U.S. liqufied natural gas (LNG) exports. International LNG contracts are often linked to crude oil prices, even though their relationship may be weakening. Global demand for LNG is also directly influenced by oil prices, as LNG competes directly with petroleum products in many applications.

When the North Sea Brent spot price, which is the principal benchmark price for crude oil on world markets, rises in the High Oil Price case, world LNG contracts linked to oil prices become more expensive, making LNG exports from the United States more desirable. In the High Oil Price case, the Henry Hub natural gas spot price remains close to the Reference case price through 2020. However, higher overseas demand for U.S. LNG exports raises the average Henry Hub spot price to $10.63/million Btu in 2040, which is 35% above the Reference case price.

Changes in the Henry Hub natural gas spot price generally translate to changes in the price of natural gas delivered to end users. The delivered price of natural gas to the electric power sector is highest in the High Oil Price case, where it rises from $4.40/mmBtu in 2013 to $10.08/mmBtu in 2040, compared with $8.28/mmBtu in the Reference case. Higher delivered natural gas prices result in a decline in natural gas consumption in the electric power sector in the High Oil Price case, from 8.2 Tcf in 2013 to 6.8 Tcf in 2040, compared with an increase in natural gas consumption in the electric power sector to 9.4 Tcf in 2040 in the Reference case. In the Low Oil Price and High Oil and Gas Resource cases, smaller increases in delivered natural gas prices result in more consumption for power generation than in the Reference case or High Oil Price case in 2040.

In the Reference case, new generation capacity added through the projection period includes 144 GW of natural gas-fired capacity, 77 GW of renewable capacity (45% is wind and 44% solar), 9 GW of nuclear capacity, and only 1 GW of coal-fired capacity. Significant variation in the mix of generation capacity types added in the different AEO2015 cases also affects generation prices. Natural gas capacity additions vary substantially, with only 117 GW added in the Low Economic Growth case and 236 GW added in the High Economic Growth case. In the High Economic Growth case, a more vibrant economy leads to more industrial and commercial activity, more consumer demand for electric devices and appliances, and consequently greater demand for electricity.

In 2013, coal made up 44% of total generation fuel costs, and natural gas made up 42%. In 2040, coal makes up only 35% of total fuel costs in the Reference case, compared with 55% for natural gas. Oil, which is the most expensive fuel for generation, accounted for 6% of the total generating fuel costs in 2013 and from 2019 through 2040 accounts for only 3% of the total. Nuclear fuel accounts for 6% to 8% of electricity generation fuel costs throughout the projection period.

Natural gas consumption in the AEO2015 Reference case increases from 26.9 quadrillion Btu (26.2 Tcf) in 2013 to 30.5 quadrillion Btu (29.7 Tcf) in 2040. The largest share of the growth is for electricity generation, where demand for natural gas grows from 8.4 quadrillion Btu (8.2 Tcf) in 2013 to 9.6 quadrillion Btu (9.4 Tcf) in 2040, in part as a result of the retirement of 40.1 GW of coal-fired capacity by 2025. Natural gas consumption in the industrial sector also increases, rapidly through 2016 and then more slowly through 2040, benefiting from the increase in shale gas production that is accompanied by slower growth of natural gas prices.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.