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Deloitte: Rising demand making shale gas dominant US source

Growing demand will push North American natural gas prices higher, spurring producers to increase activity and eventually make shale gas the dominant US supply component, a new analysis by Deloitte’s Center for Energy Solutions predicted.

“Increasing shale gas output bolsters domestic gas production, which grows from about 66 bcfd in 2011 to almost 79 bcfd in 2018 before tapering off,” it said in its reference scenario.

“The great thing about this growth is that it’s not in the future. It’s happening now,” observed Peter J. Robertson, a retired Chevron Corp. executive who is an independent senior advisor at the financial services firm.

US gas prices, which climbed to unprecedented levels during 2005-08 before retreating, allowed technologies to be developed that helped shale gas grow to 20% of total US production in 2010, he said during the report’s Sept. 14 release at the US Energy Association.

“The technologies themselves weren’t new. The combinations were, and they grew more sophisticated,” Robertson said, adding, “We’ve seen in other instances where repetitive use of technologies helps drive production costs down. We expect it to happen increasingly with shale gas, but there also could be more regulatory expenses. Frankly, there’s a lot of shale gas that can’t be produced economically below $7/MMbtu, but you won’t hear many producers say this.”

The report, “Navigating a Fractured Future: Insights into the Future of the North American Natural Gas Market,” also contains a higher demand scenario and a lower shale gas cost scenario. Under its reference scenario, prices rebound as gas demand for power generation grows sharply. Basis differentials dramatically change as production from the Marcellus and other eastern shales grows, and consumers no longer need to pay transportation charges for gas from the Gulf Coast and Rocky Mountains.

Costs will be key

Shale production costs will be the key, suggested Tom Choi, natural gas market leader at Deloitte MarketPoint LLC and coauthor of the report with Robertson. “We certainly have substantial shale gas supplies, but not all of them are in sweet spots,” he said. “As those spots are depleted, more technically challenging supplies will need to be produced and prices will rise.”

Choi said Deloitte expects more growth in gas demand for power generation over the next 20 years than the US Energy Information Administration because higher nitrogen oxide and sulfur oxide restrictions will accelerate the retirement of US coal-fired power plants.

Up to 30% of them will be closed in the next 20 years, either for environmental or economic reasons, he indicated. More stringent carbon dioxide emissions requirements would accelerate the process, although Deloitte did not make that part of its forecast model, he said.

“The Mid-Atlantic region, where the Marcellus shale is located, has historically been one of the highest US gas price points. That will change as production grows,” Choi said. “There’s been a lot of activity in other shale areas, but much of that started when prices were higher. Some of it has fallen since.”

The report’s reference scenario suggested that Canadian gas production would decline over the next several years, reducing imports to the US, before beginning to rebound as production from the Horn River and Montney shales starts to replace depleting Western Sedimentary Basin supplies. Canadian gas production shifts could affect price basis differentials in California markets, making them increase as East Coast differentials come down, Choi said.

LNG import outlook

Near-term US demand for LNG imports looks bleak, but could begin to grow significantly in the middle of this decade and eventually become a fairly significant US supply component, the report’s reference scenario said. “In 2025, what’s pushing US imports up would be the advent of Venezuelan exports,” said Choi. “Even if they grow significantly, US imports of LNG won’t approach domestic import and storage capacity, which is significantly greater than much of Europe and Asia.”

Economics could temper prospects for US imports of LNG, he continued. “Exporters have other markets that offer higher net-backs,” he explained. “Why would Qatar sell LNG to US customers, which it could do economically, if it can sell to Europe and Asia for $10/MMbtu?”

But the report’s North American gas outlook inevitably swung back to prolific US shales, which Gary Adams, vice-chairman of oil and gas at Deloitte LLP, said has revived US mergers and acquisitions. “There’s a significant production talent gap that needs to be addressed,” he said. “Transportation and supply infrastructure needs to be developed, which will require significant investments.”

Adams predicted that there also will be a major effort to reduce production costs. “Low gas prices are helping the petrochemical, fertilizer, and other US industries stay competitive,” he said. “Shale gas formations in Europe offer interesting possibilities. It’s a global resource, but the US still has the best political environment.”

“There’s no question that regulation adds costs,” Robertson added. “But I’m a great believer that the US will get this right, particularly since so many important people are working together behind the scenes to make sure that it happens.”

Contact Nick Snow at nicks@pennwell.com.


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