The Golden Age of US Natural Gas How will producers supply expanding demand?

Rick Smead, RBN Energy

The golden years of natural gas abundance are off and running, with export projects, new industrial proposals, new power generation use, and expanded transportation use - all building on a perception of long-term abundant supply at reasonable prices.  Does it all work out in the end?  Do supply and demand balance at stable, affordable prices, even with a lot more demand? Today we examine the likelihood that gas producers can provide adequate supplies without causing significant upward pressure on prices.

This is Part III in our series analyzing the concerns voiced by some as to whether the natural gas renaissance is real and sustainable, with plenty of natural gas at reasonable prices. In Part I “Golden Years: The Golden Age of U.S. Natural Gas,” we tackled the history of industry regulation before the shale era. In Golden Years:  The Golden Age of U.S. Natural Gas Part II—How Much Gas Do We Need?, we developed a reasonable demand scenario out to 2025. [Why does our scenario go out to 2025? See the box insert for an explanation.]  Our total US demand estimate of 92.5 Bcf/d represented an upward adjustment of 15.5 Bcf/d over EIA’s 2013 estimate (77 Bcf/d) . We knew EIA’s demand estimate was balanced with supply at reasonable, stable prices (real, constant-dollar prices staying below $6.00 until the mid-2030s, and even nominal prices staying below $6.00 into the mid-2020s). Our initial goal in this episode was to determine whether our higher total demand estimate could be met without gas prices jumping higher.

Well, what a difference a couple of weeks can make.  Subsequent to that last blog installment, EIA issued the “early release” version of its next Annual Energy Outlook, AEO2014(ER).  This new forecast starts to recognize much more demand than earlier versions, getting closer to a reasonable supply-demand target than we have seen EIA do in the past.  Basically, by 2025 EIA has added about 10 Bcf per day of demand, reflecting big increases in industrial use, power generation and LNG exports over last year’s forecast.  Figure 1 compares the forecast total demand from 2013 to 2025.


Source: EIA and RBN Energy

As of 2025, EIA’s outlook last year, AEO2013 - blue line on the chart - had demand at 77.0 Bcf per day. The new release, AEO2014(ER) – red line on the chart - shows total demand of 87.0 Bcf per day – a lot closer to the estimate from our previous blog  of 92.5 Bcf/d. 

In the new EIA outlook, industrial load by 2025 goes from 21.4 to 23.0 Bcf per day.  Power generation goes from 23.2 to 26.0 Bcf per day.  Pipeline exports go from 1.4 to 2.3 Bcf per day, and LNG exports go from 2.9 to 7.0 Bcf per day.  The residual demand for all other sources is pretty flat at 28.7 Bcf per day.  

EIA shows its supply forecast meeting the total load just fine with domestic production.  And, even in the way-out years beyond the 2025 reference, EIA shows supply meeting greatly expanded demand with nominal prices not reaching double-digits until the mid-2030s.

However, there are two wrinkles in that supply-demand balance:  First, as we indicated, a reasonable 2025 demand scenario is still somewhat higher than EIA’s new forecast, by about 5.5 Bcf per day.  Second, in moving from its AEO2013 supply-demand forecast to this more robust AEO2014(ER) forecast, EIA shows some upward pressure on prices, about 30 cents or 5% in 2025.

This brings us to supply. Is EIA fully recognizing what the industry can do without a lot of upward price pressure?  Can the industry meet an additional 5.5 Bcf per day in 2025 without adding to EIA’s upward pressure?  No, EIA is not fully recognizing industry performance, and yes, the industry can do a lot more.  EIA has always been, and continues to be, conservative in catching up with what the industry can actually do.  This is not necessarily a criticism, given EIA’s mandated mission, but it does say that we should look very carefully at EIA forecasts before relying upon them in making decisions.


Source: EIA and RBN Energy

Let’s start with the production forecast used to balance with demand in AEO2014(ER).  Figure 2 sets this out, starting at about 60 Bcf per day in 2011 and reaching 87 Bcf per day in 2025.  That looks reasonable enough, right?  The two years of actual history at the beginning of the study are succeeded by slight flattening of growth, but then by steady growth to meet demand.

Well, that “slight flattening” and the subsequent rate of projected growth really make a big difference by 2025.  By examining a little more history and a couple of trend lines, Figure 3 shows us how big a difference.  Beginning in 2007, the year that shale development really gained traction (although it wasn’t “officially” recognized until 2008), and continuing through 2012, we see steep growth in U.S. production, from 52 Bcf per day to 65 Bcf per day (solid red line in Figure 3).  If production were to stay on the trend line based on that six-year period, (shown as the dotted red line), the 2025 level would be 97 Bcf per day, rather than the 87 forecast by EIA (blue line in Figure 3)  - an extra 10 Bcf per day to meet the additional 5.5 Bcf per day of demand discussed earlier.  As we can see in comparing the actuals-based trend with the black dotted line describing the trend in the EIA forecast, it is clear that EIA is predicting a substantial slow-down in the pace of development.


Source: EIA and RBN Energy

The only problem with EIA’s premise is that it doesn’t seem to be happening.  In fact, the actual production in 2013 through the first nine months, according to EIA, has averaged 66.1 Bcf per day, which is the exact value of the red trend line in Figure 3, as of 2013.  And this is happening with a gas-directed rig count that has dropped by more than half.  We will discuss some of the reasons for that continued success later in this series.

First, we need to look inside the EIA forecast at the primary component of rapid production growth - shale gas.  Figure 4 shows the history of actual shale dry gas production from 2007 forward, in red, followed by EIA’s new shale production forecast in blue.  The “flattening out” here is much more pronounced than it was in the total-supply estimate.  Shale production that has been growing at nearly 5 Bcf per day on average every year is suddenly going to drop in 2013 and then be flat?  Hmm.


Source: EIA and RBN Energy

If this were the first time we had seen this kind of expectation that the shale boom will be slamming on the brakes, it might be alarming.  But EIA has forecast something similar in every Annual Energy Outlook since the boom began. 

Figure 5 shows the most recent Annual Energy Outlooks, from AEO2010 through the new AEO2014(ER).  First, we see AEO2010 (that very flat green line) superseded by AEO2011 (black) when the actual production in red roared past the 2010 estimate in the first couple of years.  AEO2011 actually predicted that this growth would go on for another year or so, but then would flatten out.


Source: EIA and RBN Energy

But actual production just wouldn’t cooperate with these pessimistic forecasts.  By the time AEO2012 and 2013 rolled around, in the second block of Figure 5, the red “actual” curve had gone well past AEO2011, then had also jumped past AEO2012’s (brown) pessimistic view of continued progress,. 

AEO2013 (dark blue) appeared to say “great work, now you’re ready to rest.”  Wrong again.  In the third block of Figure 5, we once again see the red actual-production curve leaping past the 2013 estimate. 

And now we have the 2014 estimate, saying, one more time,that the brakes will be stomped upon, suddenly dropping some and then moving forward in stately fashion to respectable, but comparatively modest results.  And even to achieve that stately growth, EIA predicts some upward price movement from its AEO2013 forecast, suggesting that the production involved will be dipping into the more expensive parts of the cost curve.  Should we believe this?  Do you believe it?

Rounding out this retrospective of EIA’s conservative and tentative recognition of shale abundance is the summation in Figure 6, showing the exponential growth in shale production from 1990 forward, with all these sequential “flattening” forecasts sticking out the side.  This looks less like a forecast and more like a giant squid.


Source: EIA and RBN Energy

The bottom line in all this is that a much higher volume of shale gas production than the EIA forecasts looks very likely.  And a much higher volume of shale gas production means that the total production numbers built into EIA’s forecast are equally understated. 

This means that EIA’s increased demand forecast, and the higher plausible scenario that we developed in the second installment of this series, are very likely to be able to be met without breaking a sweat.

So the question we asked in our second installment, whether the producing community can meet demand growth, including exports, power generation growth, and industrial growth of substantial size, has a straightforward answer:  “You bet.”  But why is that true, what are some plausible volumes going forward, and what are the impediments that need to be sorted out along the way for the rapid growth in shale production to continue for as long as it is needed?  The answer to those questions will be the subject of the fourth and last installment in this series.  Stay tuned. 

About the author
Rick Smead is managing director, Advisory Services, for RBN Energy LLC. He specializes primarily in the natural gas sector, offering expert policy analysis and advice, litigation support, and strategic advice with respect to gas pipelines, potential supplies, and market initiatives. His background includes over nine years as a Director with Navigant Consulting, Inc., and over three decades in the natural gas industry. That experience included over 20 years as the chief regulatory officer for major interstate pipeline systems, with multiple experiences advising non-US governments in the creation of a regulatory structure. His consulting practice has spanned the LNG industry, both for project developers and for a large national oil company, and the U.S. shale gas boom and its interaction with LNG, the pipeline industry, power generation, and other gas markets. At Navigant, he managed and co-authored the first major quantification of the US shale potential in 2008, the pivotal North American Natural Gas Supply Assessment. He holds a Bachelor of Science in Mechanical Engineering from the University of Maryland and a law degree from George Washington University.

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