Natural Gas Price Forecast: Tighter Supply To Send Henry Hub Higher Post 2015


BMI's Gas Price Forecast, US$/mnBTU
2013f 2014f 2015f 2016f 2017f
*2013 consensus = Average of Q313 and Q413 consensus forecast and average price in H113. Source: Bloomberg, BMI
Henry Hub - BMI Forecast 3.75 4.05 4.50 5.50 6.00
Henry Hub - Bloomberg Consensus 3.82 4.20 4.35 4.60 4.88

Long-Term Outlook

2015 could mark a turning point for US Henry Hub gas prices. Developments targeting both domestic gas use and exports to capitalise on the US shale gas boom are to be completed from 2015, thereby increasing internal and external demand for US gas. This could see Henry Hub break the US$4.50 per mn British Thermal Units (mnBTU) mark in 2015, as supply growth falls behind the rate of increase in demand for gas in the US market. The same dynamic could push prices past US$5.00/mnBTU in 2016, at which point higher prices would spur producers to pick up production. This could ease supply tightness in 2017 to meet an expected increase in export demand which in part accounts for expectations of a less steep increase in the Henry Hub price to US$6.00/mnBTU in 2017.

Steeper Uptick From 2015
BMI Henry Hub Forecast (US$/mnBTU)

Bullish sentiments about long-term gas prices in the US are evident from the upward slope of the futures curve for Henry Hub, as illustrated below.

Market Upbeat About Long-Term Prospects
Henry Hub Futures, US$/mnBTU

Underpinning our above-consensus forecasts for Henry Hub gas prices from 2015 to 2017 are the following factors:

  • Export infrastructure capacity expansion supporting external demand growth;

  • Domestic demand growth, particularly from the petrochemical and power sector;

  • Some spare capacity in North American gas production to partially meet a rise in demand, though the supply market would likely tighten owing to a faster rate of growth in demand than supply.

Export Infrastructure Capacity Grows

LNG

Although first LNG is expected from the US in late 2015, its liquefied natural gas ( LNG ) export capacity will remain limited as only Trains 1 and 2 of Cheniere Energy 's Sabine Pass will go in operation at that time . Indeed, only three LNG export projects have received the go-ahead from the US Department of Energy ( DOE ) for exports to non- Free Trade Agreement ( FTA ) countries - Sabine Pass, Freeport and Lake Charles - of which only Sabine Pass has cleared the Federal Energy Regulatory Commission ( FERC ) hurdle and begun construction. Both Freeport and Lake Charles are targeting 2018 for first LNG deliveries.

We have taken a conservative view towards LNG exports from the US . Even though the DOE has approved 26 applications for LNG exports to FTA countries, we have only factored in our forecasts exports from the three facilities that will export to non-FTA countries as we believe they are the ones most likely to go in operation . Capacity from Sabine Pass Trains 1 and 2 (which will have an export capacity o f 12.4b n cubic metres ( bcm ) ) are considered from late 2015 and in 2016, and new supplies from Trains 3 and 4 are expected in 2017 . New capacity from Lake Charles and Freeport is only accounted for from 2018.

Gearing Up For Exports
US LNG Net Export Forecasts, bcm

Pipeline

Often neglected in the export argument is new pipeline export capacity to Mexico. Two main projects that will support a continued rise in Mexican pipeline imports from the US are:

  • Pemex's Los Ramones pipeline: The pipeline will run from Texas to Los Ramones, Mexico. Its export capacity is expected to more than double from 10.2bcm per year in December 2014 to 21.5bcm per year by December 2015, when Phase II of Los Ramones comes online.

  • Sempra Energy's Sasabe-El Oro pipeline: The second leg of the pipeline, that would extend US gas supplies from Guaymas to El Oro, is planned for a mid-2016 start. This would boost the pipeline's capacity by an additional 5.2bcm per year, from 7.9bcm that would be available from December 2014 when the first leg that runs from Sasabe, Arizona to Guaymas comes online.

Pipeline And LNG Provide Outward Push
Additions To US Export Capacity (bcm)

Therefore, between December 2014 and 2017 pipeline export capacity to Mexico could increase by 44.8bcm if these pipelines operate at full capacity. Together with LNG from Sabine Pass, the US' export capacity would grow by 69.6bcm over our forecast period from 2015 to 2017. Assuming pipeline and LNG utilisation rate of about 90%, this would still more than double US gross gas exports from 2012 levels of 45.3bcm.This would grow to around 100bcm from 2018 if Lake Charles and Freeport start exporting at full capacity at 39bcm of LNG in total.

Domestic Gas-Fuelled Investment Materialises

An increase in exports will be accompanied by a concurrent rise in domestic demand. I nvestments to capitalise on low gas prices made in the early 2010s will start to materialise from 2015. We highlight the following sectors as key drivers of domestic gas consumption growth .

Petrochemicals

The petrochemical industry has been heavily banking on cheap shale gas as a 'game changer' that would not only see a renaissance in an industry that had been eclipsed by Asian competitors, but whose revival would also boost the prospects of the wider US industrial sector. In a study published in May 2013, the American Chemistry Council (ACC) listed 110 new investment projects in the chemical sector that have been proposed to take advantage of the shale gas boom. The ACC expects US$66bn in shale gas-related investment between 2013 and 2020, with many of these projects set to start in 2016 and 2017.

Two large gas-to-liquids (GTL) that would further add to demand have also been proposed by Sasol and Shell, though they would likely come on-stream only after 2018 ( see 'Sasol Looks Further North For GTL Opportunities', July 22).

Major Petrochemical Projects In The Pipeline: Proposed And Planned
Company Start-Up Date Main End-Product
Source: BMI
Geismar Plant 1, Louisiana Methanex 2014 Methanol
Geismar Plant 2, Louisiana Methanex 2016 Methanol
St Charles, Louisiana Valero Energy 2016 Methanol
Baytown, Texas ExxonMobil 2016 Ethylene, Polyethylene
Freeport, Texas Dow Chemical 2017 Ethylene
Baytown, Texas Chevron Phillips Chemical 2017 Ethylene
Old Ocean, Texas Chevron Philips Chemical 2017 Polyethylene
Channelview, Texas LyondellBasell 2015 Ethylene, Methanol
Corpus Christi, Texas LyondellBasell 2015 Ethylene
La Porte, Texas LyondellBasell 2014 Ethylene
Clear Lake, Texas Celanese Corp, Mitsui & Co 2015 Methanol

Power

While we expect the power sector to remain sensitive to prices in its choice of gas as a feedstock in 2013 and 2014, the introduction of more stringent environmental policies could give it less leeway to manoeuvre between gas and coal in the longer term. Our Power and Renewables analysts expect President Barack Obama to take a bolder stance for greener energy in his second term. This could see growth in gas usage for the power sector particularly if the Obama Administration pushes through with the imposition of carbon limits on expensive greenhou se gas emission regulations on coal-fired facilities ( see 'Obama Bolsters US Green Credentials', July 9) . As such, our Power analysts expect gas to play an increasingly important role in the power mix between 2013 and 2022 .

Gas Makes Gains At Coal's Expense
US Total Electricity Generation By Type (TWH), 2012-2022

Many utilities have already responded to costly Environment Protection Agency (EPA) regulations by reducing the share of coal power in their portfolio. Our Power analysts are cautiously optimistic that further closures could be expected to the benefit of gas, which still appears a cheaper alternative to coal than renewable sources ( see 'Coal Under Pressure As Gas Prevails', July 11). While opposition against President Obama's green stance in Congress could see his decision reversed after his term ends in 2016, it would take time for US utilities to readjust their power infrastructure to respond to a policy reversal post-2016.

Henry Hub Demand To Grow

As such, we expect a significant increase in total gross demand for US gas between 2015 and 2017 at about 4.3% per annum on average. This compares to a 1.6% year-on-year gross demand growth forecast for 2014. Both exports and domestic demand will combine to put significant upward pressure on prices. This is especially as we expect supply growth to increase at a slower rate to gas demand growth.

Exports, Domestic Needs See Gross Demand Rise
US' Gas Supply & Demand (LHS, bcm) & Gross Demand Growth (RHS, %)

Supply: Under Pressure As Demand Grows

U pward pressure on prices arising from growing external and domestic demand needs from 2015 will provide the monetary incentive f or producers to raise production . Much of the slowdown in gas production since 2012 has been a result of falling activity in non-associated gas production, as producers that are not contracted to drill wells under lease obligations relocate their capital expenditure (capex) to higher-margin liquids-rich plays where possible.

Expectations for demand to grow in late 2014 and in 2015 and evidence of actual demand growth from 2015 could direct producers towards non-associated gas production again. Nonetheless, we expect greater supply tightness owing to the following factors:

  • High oil prices and tightness in the domestic oilfield services market. With our expectations for the price of WTI crude to remain elevated at about US$100 per barrel (bbl) in 2015, the margins from drilling for oil could still be higher than that for gas until the market reflects supply tightness more clearly in 2016. Assuming limited growth in rigs available in the US , producers could choose to prioritise liquids to gas production. Production growth is likely to only pick up when WTI falls from 2016 and in 2017 , prompting more producers to target gas ( see 'WTI Pushed Higher As Upside View Plays Out', July 26 ).

Rig Deployment Dependent On Oil-Gas Price Dynamics
US Gas Production (LHS, bcm) & WTI Crude Price (RHS, US$/bbl)
  • Limited growth in Canadian gas imports . Our forecasts for Canadian gas output assume that producers will align its production with the country's own LNG export projects. Hence, we do not expect output increases in Canada to translate into significant export volumes into the US , thereby limiting external sources of growth to total available supply in the US market .

  • Infrastructure limitations. Much of US' production growth will come from tapping its shale gas resources. According to a 2011 EIA report, 54.7% of its shale gas resources are found in the Marcellus shale formation in the northeast, followed by 10% in the Gulf Coast (Haynesville, Eagle Ford, etc) and 10% in the southwest (Barnett, etc). As the Henry Hub exchange is based in Louisiana, an increase in gas output - especially from Marcellus - would have to be adequately serviced by pipeline capacity to the Gulf Coast-based hub. With much of demand growth coming from Gulf Coast-based petrochemical and export projects, infrastructure bottlenecks preventing the flow of gas to Henry Hub would see producers in the northeast pace output growth with pipeline expansion plans, limiting the extent to which supply increases at Henry Hub.

Connecting Northeastern Supplies With Demand Down South
Map Of US Shale Gas Plays

Beyond 2018: The Policy Factor

From 2018, we highlight that upward pressure on Henry Hub could intensify. LNG production from Lake Charles and Freeport - which are set to come on-stream in 2018 - would triple its LNG export capacity from 2017 levels. A liberal assumption that all LNG export projects currently seeking approval from the DOE would eventually p roceed w ith development could raise capacity further, and exert serious pressure on the supply market.

Unconfirmed Projects The Swing Factor
Expected LNG Export Capacity (LHC) & Total Possible Capacity (RHC), bcm

We are optimistic that the US will speed up its regulatory review process, though a case-by-case assessment of export eligibility is likely remain over the short- to medium-term. This would placate worries that a sudden opening of the US gas market would dramatically hike domestic gas prices. Therefore, we see a sudden explosion in export capacity in 2018 or beyond only as an upside risk at the time of writing. Nonetheless, a gradual export policy liberalisation that would bring further projects online would support a long-term increase in Henry Hub prices, as US gas becomes open to foreign buyers.

The linkage of Henry Hub to the global gas market could see an upward convergence to global prices, such as to the UK National Balancing Point (NBP) and to Asian LNG prices. With global gas consumption growth (less the US) expected to outpace production growth especially in the period between 2018 and 2021, continued tightness in the global gas market would inevitably turn buyers turn to cheaper gas supplies available in the US market.

Global Gas Demand Growth Further Supports Henry Hub
Global (Less US) Gas Production & Consumption Growth (%)

Risks To Price Outlook

  • External demand - Upside risk to price in 2017 if FTA-only LNG projects are brought online : Four liquefaction projects that have only received approval for FTA exports have plan s to start operations in 2017: Elba Island, Dominion Cove Point, Cameron LNG and South Texas LNG. If developers decide to proceed with these projects regardless of whether a non-FTA export permit is granted by 2014 as expected , they could add an additional 39.0bcm to the US' LNG export capacity by the end of 2017. This could see a steeper spike in prices towards late-2107 than our current forecast projects .

  • Domestic Demand - Transport Consumption Exceeds Expectations. The use of natural gas vehicles (NGV) is still relatively restricted, but is rising as manufacturers increase options for the consumer market. Ford, Chrysler and GM are all moving more into the compressed natural gas (CNG) segment that has grown rapidly in European markets. We highlight that a sharp rise in gas demand from the transport sector presents a significant upside risk to our Henry Hub price forecast. This could occur if significant leaps in technology are made in the next five years to bring down the overall costs of NGV ownership. Not only are efforts being made to increase natural gas fuelling stations in the US, tax incentives and credits could also make NGV more attractive in the longer run.

US LNG Liquefaction Projects: Planned And Proposed
Name Location Status Capacity (mn tpa) Capacity (bcm) Trains Owners Start-Up Date
Source: DOE, FERC, BMI
Kenai Alaska Mothballed 1.30 1.79 1 ConocoPhilips 1969
Sabine Pass Trains 1, 2 Louisiana Construction 9.00 12.42 2 Cheniere LNG 2015
Elba Island Phase I Georgia Awaiting DOE 1.50 2.07 1 Shell, Kinder Morgan 2016
Dominion Cove Point Maryland Awaiting DOE 5.25 7.25 1 Dominion 2017
Cameron Trains 1 Louisiana Awaiting DOE 4.50 6.21 1 Sempra Energy 2017
Cameron Trains 2, 3 Louisiana Awaiting DOE 9.00 12.42 2 Sempra Energy 2018
Sabine Pass Trains 3, 4 Louisiana Construction 9.00 12.42 2 Cheniere LNG 2017
Oregon Oregon Awaiting DOE 9.00 12.42 2018
South Texas LNG Export Texas Awaiting DOE 8.00 11.04 Pangea LNG, Statoil 2017
Freeport Texas Awaiting FERC 13.20 18.22 3 ConocoPhillips, Michael Smith 2018
CE Louisiana Awaiting DOE 8.00 11.04 8 CE FLNG 2018
Lake Charles Louisiana Awaiting FERC 15.00 20.70 3 Energy Transfer Equity, BG 2018
Gasfin Louisiana Proposed 1.50 2.07 Gasin Development TBD
Magnolia Phase I Louisiana Proposed 4.00 5.52 1 LNG Ltd TBD
Venture Global Louisiana Proposed 5.00 6.90 Venture Global TBD
Jordan Cove Oregon Awaiting DOE 6.00 8.28 Williams companies, Pacific Gas & Electricity Q318
Gulf LNG Liquefaction Mississippi Awaiting DOE 11.50 15.87 Southern Gulf LNG, GE Energy Financial Services, Atlas Energy, Magnetar Capital, Tortoise Capital, Triangle Peak Partners, Blackrock TBD
Gulf Coast LNG Export Texas Awaiting DOE 20.74 28.62 4 Gulf Coast LNG Export TBD
Corpus Christi Texas Awaiting DOE 13.50 18.63 3 Cheniere Energy 2017
Sabine Pass Trains 5. 6 Louisiana Construction 9.00 12.42 2 Cheniere LNG 2018
Golden Pass Texas Awaiting DOE 15.60 21.53 3 Qatar Petroleum, ExxonMobil Jun-18
Excelerate Liquefaction Texas Awaiting DOE 10.00 13.80 2 RWE, Excelerate Holdings TBD
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This article is tagged to:
Sector: Autos, Oil & Gas, Petrochemicals, Power
Geography: Global