Fuel switching in the power sector offers the most viable long-term solution for the natural gas sector as it works to rebalance supply and demand in the market, executives said Monday.
With gas prices hovering in the low to mid-$2/MMBtu range, generators are increasingly turning to gas to meet their power needs, with switching taking place in every region of the US.
The Southeastern US continues to see the highest levels of fuel competition, but the Midwest -- home to a large concentration of industrial demand and traditionally seen as coal territory -- is seeing a significant level of switching as well, putting it second to the Southeast, said Teri Viswanath, director of strategy at BNP Paribas Energy Trading.
"Fuel-switching is the most important dynamic to watch for in 2013," Viswanath said during a panel discussion at the LDC Gas Forum-Northeast in Boston. "Baseload coal plants are losing market share."
Viswanath said she expects fuel switching -- both from coal to gas and from oil to gas -- to continue well into the summer, leaving less gas available for storage.
That trend has already become apparent, with the US seeing lower-than-normal injections the past two months. The increased use of gas for power demand, coupled with an unusually warm start to spring, have prompted Viswanath to project storage to exit the traditional injection season at 3.87 Tcf, a projection she admits the market won't buy "until we bump up against that level. This is a show-me market," she said.
Most analysts peg storage ending the injection season this October above 4 Tcf.
"Full is full. This market isn't out of the woods yet," Viswanath said.
Viwswanath warned, however, that summer usually is a time when all baseload capacity, including coal, is up and running. If temperatures fail to materialize, utilities would likely return to coal for their power needs. Increased coal use could also come if gas prices increase to unattractive levels.
Jens Okland, president of Statoil Natural Gas, said the changing supply dynamic in the US has created a system that is much more responsive than it used to be.
"You can quickly take things down, but you can also ramp up very quickly. That speed of things will also act as a cap on natural gas prices," Okland said.
POWER SECTOR AS 'SHING HOPE FOR DEMAND'
Andrew Bradford, director of origination and business development at Platts unit Bentek Energy, agreed that fuel switching would drive much of the gas demand in the near term.
"Power generation is a great shining hope for demand," Bradford said.
But fuel-switching alone will not boost demand enough to keep up with supplies, Viswanath said.
LNG exports, ammonia demand, industrial demand and regulatory changes, including the Cross-State Air Pollution Rule that aims to reduce power plant emissions of sulfur dioxide and nitrogen oxide, also are critical drivers of gas demand going forward.
These drivers will help boost demand and give prices a much-needed jolt, Viswanath said. She expects Henry Hub prices to average $2.75/MMBtu in 2012, $4/MMBtu in 2013 and then double to $8/MMBtu in 2015.
The US Energy Information Administration, meanwhile, expects gas prices to average $2.45/MMBtu in 2012 and $3.17/MMBtu in 2013.
Bradford, meanwhile, said he expects gas prices to remain in the $2.50-$5 range through 2017. In hedging his own outlooks, he questioned whether Bentek was seeing the whole picture on the demand side.
"Is demand much more aggressive than what we're seeing? There are a lot of gray areas. It's tricky analyzing demand," he said.
Regardless, Bradford said it was hard to see gas prices going to $8/MMBtu by 2015.
Despite the multitude of potential drivers for gas demand, Bradford said much of the US is poised to remain long on gas for the next five years. The Northeast, in particular, could begin exporting supplies to other regions on a seasonal basis by 2015, he said.
"Northeast production is really pushing on inbound flows as well as storage withdrawals," Bradford said, noting the region ended the withdrawal season net long 3.8 Bcf/d. "Northeast production is greater than all inbound flows combined."
Bradford said Bentek estimates that even cutting the number of rigs by some 50% from peak levels would still result in 3 Bcf/d of growth in the dry areas of the Marcellus Shale.
"Northeast demand growth will continue to lag production through 2017," Bradford said.
