Led by improvements in drilling and completion technology, well performance, new infrastructure additions and overall better single well economics, the shale gas boom in North America has brought online large amounts of dry natural gas averaging around 79 billion cubic feet (Bcf) per day in 2012. IHS expects North American production to remain resilient despite the decrease in the number of rig count.

Demand: ready, set… go!

Resilient North American natural gas production creates a period of soft prices at a time when North American natural gas demand is growing at a slow pace. However, the period of soft prices is about to change. A sizeable increase in natural gas consumption from the power sector, as well as a brighter outlook for certain natural gas-intensive industries, are driving IHS CERA's expectation of a nearly 18 Bcf per day growth in North American natural gas demand-excluding LNG exports-by 2020 over 2010 levels. The growth will come in spurts coinciding with the additional retirement of coal-fired power plants in 2015 as the Mercury and Air Toxic Standards rule comes into effect in April of that year, and with the completion of planned petrochemical projects. About 90% of expected natural gas demand growth in the United States from 2010 to 2020 will come from the electric power sector, LNG exports and pipeline exports to Mexico. See Figure 1.

The largest growth in demand is expected to come from the electric power sector driven by an increase in electricity loads and significant coal-fired capacity retirements. Natural gas-fired electric power generation will replace those retirements and will constitute around 50% of North American electric power generating capacity additions by 2020 (renewables will constitute the remaining percentage of additions). About 60% (11 Bcf per day) of total natural gas demand growth in North America will come from the electric power sector by 2020.

Efficiency gains, population growth concentrated in the South and West, and an increase in electric heating appliances are limiting prospects for residential and commercial North American natural gas demand growth despite the increase in the number of customers. IHS CERA expects a small uptick in commercial consumption and a flat to a slight decrease in residential consumption by 2020.

Several gas-intensive industrial segments (chemicals, primary metals, non-metallic minerals, food) are poised to grow owing to a combination of low natural gas prices and a recovery in key end-use markets such as automotive and construction. Industrial natural gas demand gains will be concentrated in the Gulf Coast and the Midwest, as well as in Alberta (driven by oil sands production) and Ontario. IHS CERA expects an uptick in North American industrial natural gas consumption of 3 to 4 Bcf per day by 2020.

Demand for liquefied natural gas (LNG) as a fuel in the transportation sector -particularly for heavy-duty vehicles-is expected to grow in earnest after 2020, as the fueling infrastructure is more widespread and truck operators become convinced that payback time estimates are real.

Pace of Change: supply chasing demand

A US Department of Energy staff member once said that "producers tend to respond to price signals rather than demand signals". Figures 2 and 3 show total demand year-over-year growth and the pace of change challenge that the North American gas market will be facing this decade. Supply lags demand changes due to lagging price signals. This causes tightness in the market and a cyclical increase in natural gas prices. Increase in prices stimulates production and could take the market to an oversupply position especially if the increase in supply comes in after the surge in demand. If producers do not anticipate demand increases and consequently ramp up production well before seeing a price signal, North American natural gas supply will be constantly chasing demand for the rest of the decade.

Figure 2: North American Total Demand Growth

Figure 3: Supply Lags Demand Changes

Posted 26 September 2013

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.