Kate Mackenzie Natural gas may have to wait a little longer

The news about natural gas in the US has been a little more positive of late.

In September traders began to feel confident that natural gas would not overflow the storage capacity, boosted by  news that there was still a few hundred billion cubic feet available, helping prices out of the $3-$4 range. In mid-October supplies still stood more than 150bn cubic feet short of estimated capacity.

This is all welcome news for the gas industry, much of which has been furiously drilling for shale gas despite the downturn in prices. Gas, many now believe, is the power source of the future: cleaner than coal and apparently far more abundant than was once thought.

But Barclays Capital analysts remain sceptical that we are heading for a natural gas power revolution, at least before 2012:

To a significant degree, as goes the power industry so goes the demand trajectory for gas. Just when the gas industry has unveiled significant supply growth potential, the power sector looks like it wants to cut gas from its diet by adding a significant amount of non-gas power plant capacity that follows the hit already taken from a power demand pullback.

The BarCap analysts in August pointed out that natural gas demand growth was closely linked to power demand, which is not doing so well this year. They forecast half of the non-weather related demand decline to recover in 2010, and the other half in 2011.

This yields power demand growth of 3% in 2010, and growth of 1.7% in 2011 (as shown in Figure 3). A higher or lower economic growth rate would automatically translate to a higher or lower power demand growth rate. Add to the mix a raft of efficiency programs that are likely to dampen the growth trajectory.

So, how about gas in particular? Growth, they say, is likely to be supplanted by both coal and renewables.

Some 16GW of coal-fired capacity is coming online in the next four years, and BarCap says half of that is located in areas likely to displace gas. Some of these plants were commissioned before 2008, when gas was thought to be running out in North America. But even the newfound abundance of gas might not completely change that:

Although we can debate the long-run cost effectiveness of a new coal plant compared with a new gas-fired unit, the volatility of gas prices can yield a wide range of estimates of the cost of gas-fired power. That is, the uncertainty over future gas prices is a competitive disadvantage for the fuel. Note that some gas producers have recently proposed selling gas under long-term contracts to provide buyers certainty of fuel costs. Although coal plants do emit about twice the CO2 of a modern, gas-fired combined cycle plant, draft federal cap-and-trade legislation would not severely handicap coal for the next several years.

Meanwhile renewables capacity is also growing, helped by renewable portfolio standards in many states. BarCap notes that the EIA forecasts 267GW of non-hydro renewable capacity will be added by 2020, but much of this will not be available until 2020.

Their base outlook for the next two years doesn’t augur well for natural gas, as non-gas capacity output will keep up pretty closely with the demand increase:

But all is not lost for natural gas. There are chinks in the renewables plans, and beyond 2011, things might pick up:

The challenges in upgrading the interstate transmission system remain the Achilles heel of the renewables build-out. Also, cap-and trade legislation is likely a few iterations from final. That natural gas is both cost-effective and clean burning has been recently lost in the debate, but perhaps just for now.

So the much talked-about natural gas lobbying efforts might be starting to pay off.

Related links:

Natural gas: Not so unstoppable after all? (FT Energy Source, 27/08/09)