There is no question that landmark U.S. measures to slash carbon emissions from power plants over the next 15 years will boost demand for natural gas, an abundant, cleaner-burning alternative to coal.
Yet far from adding a bullish new dimension to the U.S. natural gas market, the rules the Environmental Protection Agency (EPA) proposed this week have only added to the gaping uncertainty traders face in the coming decade, with factors as such as liquefied natural gas (LNG) exports and increased industrial usage in flux.
At one extreme, the new rules could boost demand by as much as 10 billion cubic feet (Bcf) per day by 2020, equivalent to a 14 percent increase from today, according to America's Natural Gas Alliance (ANGA), a Washington-based trade group.
"Natural gas is going to have to play a big role in the solution because it is the cheapest way in which to get emission reductions in the power sector," said Erica Bowman, ANGA's chief economist. Gas plants emit about half the CO2 emissions of coal plants, she says.
Barclays, meanwhile, sees only "marginal upside risk" to its forecast that power demand for natural gas will rise by less than 2 Bcf per day through 2025. The forecast increase is low because many coal-fired power plants are already closing due to previous EPA rules curbing mercury pollution, Barclays says.
The difficulty in predicting how the curbs will affect natural gas are partly a result of the EPA's pledge to allow states "flexibility" in how they implement the Clean Power Plan, which requires the U.S. power sector to reduce carbon dioxide emissions by 30 percent from 2005 levels by 2030. [ID:nL1N0OJ0FC]
Rather than set hard targets for individual plants, the EPA will give states until the summer of 2016 to come up with plans to meet their specific goals, with alternatives ranging from solar arrays, to efficiency schemes, to carbon trading systems to nuclear power.
Individual states would be eligible for an extension until June 2017 to come up with their implementation plans, and states participating in multi-state plans would be eligible for an extension until June 2018.
The final impact for gas will be heavily dependent on how states choose to implement the rule, said Prajit Ghosh, a senior adviser for North America power at consultant Wood Mackenzie.
"Some states might choose to weight their plan toward energy efficiency savings and less on coal-to-gas switching," said Ghosh, who sees about 3 Bcf per day demand growth as a likely outcome of the EPA plan.
Forward gas prices showed little reaction to Monday's announcement of the plan, given that the mandated reduction in CO2 was in line with industry expectations. Average natural gas prices for 2020were little changed at just below $5 per million British thermal units (mmBtu), versus $4.30 for 2015 .
EXPORTS TOO
An expected implementation timetable of 2017 or beyond means increased gas use by power generators will coincide with rising demand for exports through LNG terminals and pipeline exports to Mexico, along with new demand from chemical and industrial plants, mostly along the U.S. Gulf Coast.
That confluence of events may intensify the short-term impact of the rules, with states striving to meet an interim 2020 target of curbing emissions by 25 percent.
The power sector is already halfway toward meeting that goal: Cheap, plentiful gas supplies and lower power demand have reduced emissions since 2005, and the industry is "on the trajectory" to meet the EPA's announced carbon targets, said Brandon Blossman, managing director of coal and power research at Tudor, Pickering, Holt & Co, an investment banking firm.
Still, the retirement of existing coal-fired plants will likely boost gas consumption in the power sector by 5-6 bcf per day by 2020, lifting benchmark Henry Hub gas prices by 60-70 cents, said Peter Abt, managing director of Black & Veatch's management consulting division.
"Most of that impact will come sooner, rather than later," said Abt. After 2020, Abt said the need for additional gas may drop significantly, to an additional 0.5 bcf per day. "They just won't run the coal plants; they'll replace them with gas," he said.
The task will grow harder if the U.S. economy expands at a faster clip, potentially reigniting electricity demand.
Creating as much as 10 bcf per day of additional gas consumption assumes renewed growth in electric power demand, which has slowed across the nation since 2008, Blossman said.
Just as there is little doubt about increased demand, most analysts are confident that the nation's vast shale resources are more than sufficient to meet the need. Whether the necessary logistics are in place may be a different question.
"It looks like the resource base can handle it," said Jen Snyder, a principal gas analyst at Wood Mackenzie. "The tricky part is making sure the pipeline capacity is there to deliver the gas to markets that need it."
Source: Reuters
Yet far from adding a bullish new dimension to the U.S. natural gas market, the rules the Environmental Protection Agency (EPA) proposed this week have only added to the gaping uncertainty traders face in the coming decade, with factors as such as liquefied natural gas (LNG) exports and increased industrial usage in flux.
At one extreme, the new rules could boost demand by as much as 10 billion cubic feet (Bcf) per day by 2020, equivalent to a 14 percent increase from today, according to America's Natural Gas Alliance (ANGA), a Washington-based trade group.
"Natural gas is going to have to play a big role in the solution because it is the cheapest way in which to get emission reductions in the power sector," said Erica Bowman, ANGA's chief economist. Gas plants emit about half the CO2 emissions of coal plants, she says.
Barclays, meanwhile, sees only "marginal upside risk" to its forecast that power demand for natural gas will rise by less than 2 Bcf per day through 2025. The forecast increase is low because many coal-fired power plants are already closing due to previous EPA rules curbing mercury pollution, Barclays says.
The difficulty in predicting how the curbs will affect natural gas are partly a result of the EPA's pledge to allow states "flexibility" in how they implement the Clean Power Plan, which requires the U.S. power sector to reduce carbon dioxide emissions by 30 percent from 2005 levels by 2030. [ID:nL1N0OJ0FC]
Rather than set hard targets for individual plants, the EPA will give states until the summer of 2016 to come up with plans to meet their specific goals, with alternatives ranging from solar arrays, to efficiency schemes, to carbon trading systems to nuclear power.
Individual states would be eligible for an extension until June 2017 to come up with their implementation plans, and states participating in multi-state plans would be eligible for an extension until June 2018.
The final impact for gas will be heavily dependent on how states choose to implement the rule, said Prajit Ghosh, a senior adviser for North America power at consultant Wood Mackenzie.
"Some states might choose to weight their plan toward energy efficiency savings and less on coal-to-gas switching," said Ghosh, who sees about 3 Bcf per day demand growth as a likely outcome of the EPA plan.
Forward gas prices showed little reaction to Monday's announcement of the plan, given that the mandated reduction in CO2 was in line with industry expectations. Average natural gas prices for 2020
EXPORTS TOO
An expected implementation timetable of 2017 or beyond means increased gas use by power generators will coincide with rising demand for exports through LNG terminals and pipeline exports to Mexico, along with new demand from chemical and industrial plants, mostly along the U.S. Gulf Coast.
That confluence of events may intensify the short-term impact of the rules, with states striving to meet an interim 2020 target of curbing emissions by 25 percent.
The power sector is already halfway toward meeting that goal: Cheap, plentiful gas supplies and lower power demand have reduced emissions since 2005, and the industry is "on the trajectory" to meet the EPA's announced carbon targets, said Brandon Blossman, managing director of coal and power research at Tudor, Pickering, Holt & Co, an investment banking firm.
Still, the retirement of existing coal-fired plants will likely boost gas consumption in the power sector by 5-6 bcf per day by 2020, lifting benchmark Henry Hub gas prices by 60-70 cents, said Peter Abt, managing director of Black & Veatch's management consulting division.
"Most of that impact will come sooner, rather than later," said Abt. After 2020, Abt said the need for additional gas may drop significantly, to an additional 0.5 bcf per day. "They just won't run the coal plants; they'll replace them with gas," he said.
The task will grow harder if the U.S. economy expands at a faster clip, potentially reigniting electricity demand.
Creating as much as 10 bcf per day of additional gas consumption assumes renewed growth in electric power demand, which has slowed across the nation since 2008, Blossman said.
Just as there is little doubt about increased demand, most analysts are confident that the nation's vast shale resources are more than sufficient to meet the need. Whether the necessary logistics are in place may be a different question.
"It looks like the resource base can handle it," said Jen Snyder, a principal gas analyst at Wood Mackenzie. "The tricky part is making sure the pipeline capacity is there to deliver the gas to markets that need it."
Source: Reuters
