With the surge in unconventional gas production – IHS CERA projects that shale production alone will be 44% of US gas production in 2013 – come options. IHS CERA expects US Lower-48 natural gas demand in 2020 will exceed 2008 demand by 21.5 billion cubic feet (Bcf) per day (see Figure 1). Investors are busily chasing those options, and in the process a perhaps misleading picture is emerging in the press. Any person would be forgiven if, from the headlines, he or she concluded that as a result of the shale boom there would be an ethylene cracker on every corner, an LNG liquefaction terminal on every Gulf Coast beach, and two natural gas vehicles in every garage – with despair running rampant among Middle Eastern oil, gas and petrochemical producers. Looking at the actual projects and adding up the numbers yields a different picture.

On any time scale, the largest source of new natural gas demand is the electric power industry. Power loads will continue to grow, even taking into consideration efficiency and conservation, if for no other reason because power is the great enabler of the digital age. With each new gadget comes new load.

In fact, growth in electric power gas demand will be the net result of three major trends – coal displacement, coal retirements, and power load growth – so that gas-fired generation gains market share in the generation mix, even as capacity additions in renewables (primarily wind and solar) stimulate rapid growth in the generation of renewable energy. If we use 2008 as a starting point – eliminating most of the effect of the recession, by 2020 gas consumption from electric power will have grown by 11.3 billion cubic feet per day – 52% of the total demand growth during the period.

While this may seem like a large number, incremental power industry demand for gas has already reached 8.2 Bcf per day in 2012 from coal displacement. Coal displacement occurs when gas, normally the more expensive fuel, becomes cheaper than coal for the purpose of generating power, forcing coal plants back in the dispatch queue and causing them to temporarily shut down. This staggering figure was the result of the very low price of natural gas in 2012: $2.75 per million British thermal units on average at Henry Hub.

Coal displacement will decline as the price of gas rises and as less efficient coal-fired power plants are retired, particularly in 2015 in response to the MATS (mercury and air toxics standards) rule. The resulting demand accounts for about half of the power-related demand growth, with load growth accounting for the rest.

By 2020, exports of liquefied natural gas (LNG) will be the second largest new source of demand after electric power. LNG exports from the US Lower-48 are expected to reach 4.9 Bcf per day in 2020 or nearly 23% of the expected demand growth. This is a significant source of new demand. In the popular imagination the figure 12 Bcf per day – one of the scenarios analyzed by the US Department of Energy – looms large, and the related and frightening image of US gas prices rising to the much higher global price level looms even larger. However, most of the projected LNG demand growth is already committed to specific supply sources, and this will limit US LNG exports.

One of the larger sources of expected new natural gas demand gets little if any press attention. This new demand source is exports to Mexico. Mexico is a partner with the US and Canada in the NAFTA treaty and is connected to the continental pipeline grid in the southwestern US and in south Texas. While Mexico does have potentially enormous shale gas reserves, for now at least, Mexico's legal environment dis-incentivizes development of those reserves. As long as that is the case, importing readily available and inexpensive US shale gas makes sense, particularly as pipeline capacity additions come on line toward the end of the decade. IHS CERA projects growth in exports to Mexico of 2.4 Bcf per day by 2020.

Petrochemical demand is the central figure in the story entitled 'industrial renaissance' and it too will increase natural gas consumption – by about 1.7 Bcf per day by 2020. With all of the talk of new ethylene crackers, a casual observer would expect a larger figure. But ethylene crackers use ethane as their primary feedstock, and only a comparatively small amount of methane for process heat. Still, by providing an expanded market for the ethane, the petrochemical industry enables gas production growth. Support from the ammonia and methanol industries, which use natural gas as a feedstock, is required to reach the 1.7 Bcf per day figure.

Natural gas vehicles excite the public imagination and stimulate joy among the headline writers, as visions of an end to dependence on imported oil dance on editorial pages across the land. IHS CERA sees the potential for significant growth in demand for natural gas in the transportation sector, particularly among heavy trucks – but not by 2020 when this will account for a mere 0.3 Bcf per day of demand growth or 1.2% of projected growth.

Deriving a picture of the market on the basis of the headlines can often be like looking in a fun house mirror. But when one looks at the numbers, the real picture comes into focus. As the picture becomes clear, we find that it is the power industry that sits at the center of the emerging picture of natural gas demand growth.

Posted 5 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.