Bentek: Increased future demand could overtake U.S. gas production

Gas tanks
Source: DollarPhotoClub

For the last decade the shale revolution has driven the U.S. gas prices down. This, however, might soon change as the growing demand for the fuel is likely to push prices back up and put a strain on natural gas production.

A new study by Bentek, “Debunking the Alternative Gas Demand Myth” takes a closer look at several of these new demand sources with a goal of determining their viability given the inherent economics of each application and the expected market conditions over the next five years.

According to the study, several main project types – including methanol, ammonia and nitrogen fertilizer projects, ground and marine transportation, and gas-to-liquids (GTL) projects – carry the potential to significantly alter the US gas landscape if they grow at their projected pace simultaneously.

All of these new or re-emerging demand growth areas hold the potential to massively alter the US gas marketplace when considered along with more than 40 proposed LNG export projects being planned in the US and with demand growth from the 57 GW of gas-fired power plants planned or proposed for construction in the US.

Gas-to-liquids (GTL)

Wide petroleum-to-natural gas price spreads indicate that is likely to change in the next few years, with more than a dozen proposed GTL plants announced for North America, amounting to potential demand approaching 1.5 Bcf/d. The GTL projects that have attracted the most attention are the extremely large proposed plants that are expected to cost tens of billions of dollars to develop, but small GTL plants may end up hitting the market first due to their lower cost and shorter construction time.

Methanol

Many new methanol production facilities are also being considered – nearly a dozen US plants have been announced, and some of the proposed GTL facilities also would produce methanol and then convert it to gasoline, or would be developed in conjunction with methanol plants.

Lower natural gas prices have reduced feedstock costs at the same time that methanol prices have increased significantly, resulting in better production margins. In total, the 13 proposed methanol plants could add 1.6 Bcf/d of demand for natural gas by 2019.

Fertilizers

Fertilizer production margins also have improved as US gas prices have fallen while ammonia prices (ammonia is a key ingredient to make nitrogen fertilizers) have increased. US fertilizer demand has been increasing due to a rise in both domestic and global crop production.

Bentek is currently tracking more than two dozen new nitrogen fertilizer projects and expansions proposed over the next several years that could bring additional natural gas demand of nearly 1.3 Bcf/d from the sector. However, the fertilizer industry went through several difficult periods over the past two decades that raise concerns about demand growth from this area.

Fertilizer and methanol projects face exposure to product demand shifts and price volatility, as well as natural gas costs.

Transport

The transportation sector also holds tremendous demand growth potential as hundreds of thousands of freight and other fleet vehicles will likely be converted to burn natural gas.

Demand also is increasing from marine, rail and other transportation sectors, but the slow build-out of fuelling infrastructure and the costs of vehicle conversions have limited adoption of natural gas as a transportation fuel.

CNG and LNG

Compressed natural gas (CNG) and liquefied natural gas (LNG) also are being used for multiple “off-road” applications, including fuel for drilling rigs, fracture pumps and mining trucks. These demand growth areas are small but important when considered along with the multiple other areas of growth.

As a result it seems that emerging US natural gas demand will compete with existing demand from US power generation, residential/commercial demand, other industrial demand and global demand for LNG as the US turns to the export market. Exports to Mexico also are on the rise as that country expands its gas-fired power generation and gas pipeline infrastructure.

Consequently, US gas production, while continuing to rise, may not ramp up fast enough to meet all this new demand. Alternative supply sources of gas will likely be needed and could come from ethane rejection, flared gas, or drilled-but-uncompleted well inventories.

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