Study: EIA annual natural gas outlook needs revising

Warren R. True
Chief Technology Editor-LNG/Gas Processing

HOUSTON, Nov. 12 -- The US Energy Information Administration has largely underestimated near-term US natural gas production in its Annual Energy Outlook, released early this year, according to a study by FACTS Global Energy, Singapore, released earlier this month.

EIA's own data in its October 2008 Short-Term Energy Outlook documented the annual forecast's gap. Actual production for 2007 grew by 4.3%, rather than the originally forecast 2.7%.

Forecast production for 2008 and 2009 will rise by 6.8% and 4.3%, respectively, said the Short-Term Energy Outlook, well ahead of the originally forecast 0.9% and 0.5%.

Unconventional gas
Responsible for the rapid and unpredicted growth are the massive investments in drilling in unconventional basins, mainly shale gas, coalbed methane, and tight sandstones.

Especially important in the production growth is the Barnett shale in Texas. Predictions for two other shale plays, Haynesville in Louisiana and Texas and Marcellus in the US Northeast, are for equally large increases.

FGE says that modifications of EIA's AEO 2008 are needed to reflect recent changes in long-term supply and demand balance.

Production from unconventional resources will continue to add large volumes of natural gas to the US market, says FGE. These will "more than compensate" production decline that has been ongoing in conventional fields.

Sector demand
FGE cites the lack of extensive information about reserves and production profiles in unconventional fields as its reason for taking a conservative assumption of an average 3%/year growth for 2010-11. After 2011, unconventional growth likely will slow until about 2017.

Residential and commercial demand to at least 2013 will increase by 1%/year, says the study. Not addressed in it, however, is the effect of the current downturn in the US economy and the likelihood that it slipped into recession in third-quarter 2008. Nor is this very recent event factored into FGE's estimate of 2010-13 industrial demand growth, saying it will average about 1.4%.

FGE's estimate of power demand over the next 11-12 years differs considerably from EIA's. The consulting company believes that over the period, as much as 90% of new generation capacity added in the US will be gas-powered.

This forecast is based on nearly no nuclear power generation coming online until 2019-20, uncertainty over carbon taxation preventing generators from extensive investment in coal-fired generation, and the increased production of natural gas keeping the price low, thereby making the economics of gas-fired plants vs. coal-fired ones "likely to improve."

Again, however, the FGE study fails to address the possible effect on power demand of a deep and long US recession.

LNG
Another effect of increased natural gas production from unconventional reservoirs will be to limit the need for LNG imports until 2014. LNG, says the report, will "remain marginal in the US portfolio of supplies," and the delivery of LNG cargoes will be "unlikely" to affect the price on the US gas market.

Implicit in FGE's study is that the LNG high prices in Asia that have taken spot LNG cargoes away from the US will continue. Yet, as recently as last week, LNG cargoes into India had fallen in price by a reported 50%, to about $11/MMbtu. With US LNG demand always seen as a solid market of last resort, sellers may be more willing to send cargoes to the US.

In response to OGJ questions, FGE principal consultant and head of its gas team Cecile Jovene, who wrote the study, said it is still hard to assess the impact of the financial crisis on LNG trade. "We expect demand to slow in developed countries," she said.

The "wild cards" continue to be such developing markets as China and India. "LNG supply has been constrained by high prices in recent years and [those countries'] demand could pick up should prices fall," said Jovene.

To a lesser extent, she said, the financial crisis will also affect the pace of development of greenfield liquefaction projects. "Oil and gas majors have plenty of cash and can finance their projects without debt," said Jovene. She added that ultimately construction costs should also decrease, helping "to release tensions" on LNG prices.

About the recent fall in spot Asian LNG, she said those prices don't affect the outlook of the study. That spot price decline is triggered by the "fall of oil prices and futures gas prices in the UK. We expect spot to mid-term contract prices to fall significantly" in the next 2-4 years.

Contact Warren True at: warrent@ogjonline.com

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