WoodMac: Natural gas to trade at $5-6/MMbtu to 2013

Dec. 1, 2008
US natural gas is expected to trade at $5-6/MMbtu over the next 5 years, said an executive of Wood Mackenzie Ltd., Edinburgh, at a recent energy forum sponsored by that firm in Houston.

By OGJ editors
HOUSTON, Dec. 1 -- US natural gas is expected to trade at $5-6/MMbtu over the next 5 years, said an executive of Wood Mackenzie Ltd., Edinburgh, at a recent energy forum sponsored by that firm in Houston.

Jen Snyder, head of WoodMac North American Gas Research, told forum participants that the industry's successful development of shale gas plays has positioned the market for "significant potential over-supply." Snyder rejects a popular theory that gas prices will settle eventually at the marginal cost of the most expensive shale plays. That represents "a mistaken reading of the current and future environment," she said. "Simply stated, there is no requirement for the rapid near to midterm development of some of the more expensive or challenging shales such as the Marcellus or Horn River; the market can be adequately supplied without these volumes."

She sees "sufficient volumes available at a development break-even price of $5.50/MMbtu or below." That conclusion is based on declining demand due to "a prolonged recession" to the fourth quarter of 2010; new wind and coal-fired capacity coming online to generate electricity; and "a significant drop in drilling activity" because of a lower commodity price. "We have also factored in the positive impact on break-even costs due to cost reductions associated with this drilling slow-down and continued optimization of drilling solutions at those plays that will continue to be aggressively developed," Snyder said.

Furthermore, she said, "The results of our Global Gas Optimization Model point to significant import volumes of LNG over the next few years, despite the recent growth in unconventionals." Existing offtake agreements for some suppliers "make diversions from North America unlikely," Snyder said. "In addition, other suppliers with flexible LNG will want to avoid jeopardizing long-term contract prices in Europe and Asia, through a further weakening of spot prices in these areas." Qatar in particular is likely to direct some of its new LNG volumes to the US market "where there are no long-term contract implications and a large and liquid market to absorb the volumes," Snyder said.

WoodMac's projected gas price of $5-6/MMbtu would not be a floor price, as near-term market weakness could force prices below that range. Snyder said, "Our near-term forecast is predicated on a normal winter. While a severe winter could tighten up the market and provide some near-term support, equally a mild winter could exacerbate the current position of over-supply and lead to prices into the $4/MMbtu range in the near term. We have also assumed that gas demand benefits from a 1.5 bcfd switch from coal to gas-fired power generation. If this fails to materialize, due to collapsing coal prices, this would further add to short-term price weakness."