EIA annual outlook sees higher natural gas prices

Dec. 22, 2003
The US government's latest long-term energy forecast released Dec. 16 found that over the next 2 decades, US natural gas demand will be lower and prices higher than previously thought.

The US government's latest long-term energy forecast released Dec. 16 found that over the next 2 decades, US natural gas demand will be lower and prices higher than previously thought. LNG imports also will have a much larger market presence in coming years; the new LNG import figures are twice as large as last year's estimate.

The US Energy Information Administration's Annual Energy Outlook 2004 (AEO 2004) projects prices and other market trends through 2025. EIA said the full report, including projections with differing assumptions on the price of oil, the rate of economic growth, and the characteristics of new technologies, will be released in January 2004, along with regional projections and a report on the major assumptions underlying the projections.

EIA's latest forecast comes as Congress continues to struggle with what role—if any—it should play in shaping future US energy policy.

A sweeping omnibus energy bill failed last session, although Republican leaders pledged to return to the measure in late January.

Their proposal sought to encourage more domestic production through tax incentives; critics said the measures would only mildly stimulate new production. Meanwhile the public appeared nearly apathetic to an energy bill, although that might change given recent higher natural gas prices could soon be reflected in home heating bills. Already there are calls by some lawmakers to examine alleged price fixing; the US Senate Judiciary Committee may hold a hearing later this winter, for example.

Natural gas outlook

Click here to enlarge image

Against the backdrop of higher natural gas prices this winter, EIA predicted that average natural gas prices will increase from $2.95/Mcf (in 2002 dollars) in 2002 to $4.40/Mcf in 2025 (equivalent to about $8.50/Mcf in nominal dollars) (Fig. 1). At $4.40/Mcf, the 2025 wellhead natural gas price in EIA's 2004 analysis is 44¢ higher than the 2003 forecast.

EIA said higher natural gas prices mean that electric power generators will likely be doing more fuel-switching to coal, especially in the later years of the forecast.

Total demand for natural gas is projected to increase at an average 1.4%/ year from 2002 to 2025. Natural gas consumption, which EIA reported at 22.8 tcf in 2002, is expected to increase to 31.4 tcf in 2025, with much of the demand—about 70%—reflecting electric power generation and industrial applications.

But demand growth for natural gas will slow in later years, EIA said. The agency's projection for total consumption of natural gas in 2025 is 3.5 tcf lower than what EIA economists projected it to be in 2003.

Click here to enlarge image

Total US natural gas supply is projected to grow to 31.3 tcf in 2025, which is 3.3 tcf less than the level EIA expected last year (Fig. 2). Domestic natural gas production is projected to increase to 24.1 tcf from 19.1 between 2002 and 2025, 2.8 tcf less than the 2003 report.

Future growth in US natural gas supplies will depend on unconventional domestic production, natural gas from Alaska, and LNG imports, EIA said. Total nonassociated unconventional natural gas production is projected to rise to 9.2 tcf in 2025 from 5.9 tcf in 2002.

With completion of an Alaskan natural gas pipeline in 2018, total Alaskan production is projected to increase to 2.7 tcf in 2025 from 0.4 tcf in 2002. Total net LNG imports are projected to increase to 4.8 tcf in 2025 from 0.2 tcf in 2002—more than double EIA's 2003 projection.

Oil outlook

EIA said that world oil prices (all in 2002 dollars) are projected to decline from their current level to $23.30/bbl in 2005, before rising to $27/bbl in 2025, about the same as last year's assessment of $26.94/bbl. In nominal dollars, the average world oil price will reach about $52/bbl in 2025, EIA said.

Similarly to the natural gas outlook, the US is expected to become increasingly dependent on imports for its oil and fuel needs. Petroleum demand is projected to increase to 28.3 million b/d from 19.6 million b/d during 2002-25, led by growth in demand for transportation despite the projected increase in vehicle efficiency.

Net petroleum imports, including both crude oil and refined products, are expected to account for 70% of total US petroleum demand by 2025, up from 54% in 2002.

Crude oil imports are expected to reach 15.7 million b/d in 2025 in the 2004 report compared to 13.1 million b/d in the 2003 version. Meanwhile, refined product imports are expected to increase from 13% of total net petroleum imports in 2002 to 20% in 2025, measurably less then the 34% share projected in 2003.

The biggest share of oil production that is not from the Organization of Petroleum Exporting Countries is expected to come from Russia, EIA said. The agency's 2004 report expects Russian production to reach 10.9 million b/d in 2025, 43% above 2002 levels. EIA also dramatically revised upward the oil potential from the Caspian Sea. It predicted that production from that area will exceed 6 million b/d by 2025, compared to 1.7 million b/d cited in 2003.

In 2025, projected production from South and Central America is expected to reach 7.8 million b/d, up from the 4.3 million b/d predicted last year. EIA said a large portion of that increase—some 900,000 b/d—is expected to come from nonconventional oil production in Venezuela. Non-OPEC African production is projected to grow to 6.7 million b/d in 2025 from 3.1 million b/d in 2002, EIA said.

Economic assumptions

EIA's 2004 outlook assumes that the US economy, as measured by gross domestic product, will grow an average 3%/year during 2002-25. That rate is slightly lower than the 3.1%/year growth rate used last year.

EIA said that many of the determinants used to calculate economic growth for this report are similar to benchmarks used last year. However, the agency notes some "important" differences. EIA this year used lower nominal interest rates than last year, a higher inflation rate, and assumed unemployment levels are higher over the period this year compared to what was used last year.

"Consequently, differences between AEO 2004 and AEO 2003 cannot be explained simply by differences in GDP growth," the agency said.