ADI Analytics hosted its first North America Natural Gas and NGL forum in Houston late February. The forum was well-attended with representatives from a wide range of companies including integrated oil and gas majors, refiners, E&P independents, industrial gas suppliers, equipment providers, technology licensors, investors, and media outlets.
The forum featured several presentations by ADI analysts and panel sessions featuring external speakers and industry experts. The presentations highlighted key demand drivers, supply outlook, pricing forecasts, strategic implications, investment opportunities, and regulatory concerns around natural gas and NGLs. The panel sessions built off of the presentations and featured in-depth discussions focusing on small- and mid-scale LNG, natural gas conversion to fuels, and new innovations including the Industrial Internet of Things.
ADI Analytics extensively covered natural gas monetization options at the 2017 North America Natural Gas and NGL Forum. Since the shale gas boom, demand for natural gas in the U.S. has been driven by power generation. Of the four major demand segments, residential, commercial, industrial, and power generation, power generation has grown at over 5% per year since 2010 and industrial grew at ~2% per year, while demand from the residential and commercial segments declined.
Natural gas-fired power generation grew at a rapid pace over the past several years. From 2010 to 2016 overall electricity generation in the U.S. declined by 0.3% per year. However, natural gas-fired generation grew at 6.4% per year. There are two main drivers behind the quick growth in natural gas-fired electricity generation. First, an oversupplied natural gas market led to low natural gas prices, providing operators with a large supply of cheap feedstock.
Second, capital costs for new natural gas-fired power plants are lower than competing options by a significant margin. Figure 1 shows pre-tax overnight capital costs for multiple power generation options. The left two bars represent natural gas-fired power generation and are also the least expensive, both under $1,200 per kW. Wind and solar are ~$2,000 and ~$2,400 per kW, respectively. Finally, coal-fired overnight capital costs are over $5,000 per kW.
Figure 1
Natural gas-fired power generation is likely to peak in the U.S. in 2017 or 2018. While natural gas-fired power generation has seen significant growth since 2010, it is likely that the U.S. is at peak gas-fired power generation today for four main reasons. First, natural gas prices are expected to rise modestly through at least 2020. Second, other non-power generation options for natural gas monetization are becoming more competitive. Third, coal plant utilization rates will increase as operators look to squeeze as much value as possible from existing assets. Last, renewable energy is becoming more competitive with traditional fuels. Figure 2 shows U.S. electricity generation from 2010 to 2025. The blue bar represents natural gas-fired electricity generation, the dark gray bar represents coal-fired power generation, and the light gray represents other power generation options, comprising of mainly renewables.
Figure 2
The new administration is likely to drop the EPA’s Clean Power Plan, but it will have only marginal impacts on coal plant retirements and energy prices. The Clean Power Plan will not move forward as it was originally written. A presidential executive order was signed recently to review all regulation regarding energy production. The goal is to eliminate regulations that the administration sees as being unreasonably burdensome on the energy industry with the aim of increasing energy production, while simultaneously lowering the cost of production. The outlook for coal-fired power generation is brighter with the advent of the recent executive order.
However, reducing regulations on coal-fired power generation plants will not prevent many from retiring for two reasons. First, most coal-fired power plants are retiring because they are old. Second, state-level regulations concerning air quality will not be impacted by regulatory changes at the federal level. In all, between 2017 and 2027 coal plant retirements without the Clean Power Plan, as opposed to with the Clean Power Plan are not significantly different.
The elimination of the Clean Power Plan also has implications for the price of electricity. Overall, the elimination of the Clean Power Plan will lead to lower electricity costs, but savings vary significantly by region. Regions that are heavy in coal-fired capacity will see the greatest benefit while regions with little coal-fired power generation capacity will see smaller price reductions.
Natural gas-fired distributed generation is expected to grow due to high demand charges. Traditional power generation has been the primary driver for natural gas demand in the U.S. for the past several years. However, natural gas-fired distributed power generation is expected to continue to grow. In certain parts of the country, demand charges can make up the bulk of electricity costs. For example, the national average cost of electricity is between 8 and 8.5 cents per kWh, but in California demand charges can push electricity costs upward to between 17 and 21 cents per kWh.
Natural gas-based distributed generation can significantly reduce those costs. New combined heat and power units can push electricity costs down to between 7.5 and 9 cents per kWh. This opportunity for cost savings has spurred growth in gas-based distributed generation.
Industrial gas demand is growing slowly despite significant increases in industrial output. The industrial sector covers a broad range of markets including manufacturing markets such as refining, chemicals, automotive, and electronics, and non-manufacturing markets like mining, construction, and agriculture. Industrial gas demand is expected to grow at less than 2% through 2025. The relatively slow growth in industrial gas demand in comparison to industrial output can be attributed to increases in energy efficiency. Increased industrial energy efficiency has also led to the U.S. economy becoming more energy efficient. In 1995 it took 330 gigawatt hours of electricity consumption to generate $1 billion of U.S. GDP. By 2015, the amount of energy required to generate the same $1 billion of GDP decreased by ~25% to less than 250 gigawatt hours.
Presentations and videos from the 2017 North America Natural Gas and NGL forum will soon be available online. Additionally, we will be hosting the forum again on February 13th 2018 with more information and details to follow soon. Please contact us with any questions regarding the forum and our work.
-Tyler Wilson and Uday Turaga
[…] that the Clean Power Plan will not be moving forward. We discussed the implications of this in our presentation on natural gas in the power generation and industrial […]