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ICForecast:
Strategic Natural Gas Outlook
Petrochemical Focus
Q2 2015 - Sample
Executive Summary
Natural gas prices are expected to recover from the current low levels in the next few months.
– The current low natural gas price is linked to the pessimistic oil price outlook, even though the short-term fundamental linkage between the two markets is fairly thin.
– Higher than historical demand from the power sector observed in the first several months of 2015 is expected to continue.
– Drilling activity has declined across all major producing basins and slower production growth is expected in the coming months.
– Storage inventory is below the five-year annual average level due to cold weather in February and March; storage injection will replenish inventories over the next several months.
In the long run, gas prices will continue to strengthen as demand grows.
– Large volumes of LNG exports are still expected to come on-line, despite lower oil prices leading to weaker economics for projects in earlier stages of development.
– Incremental petrochemical gas use still expected, but ethylene production and LPG exports (and thus, gas use associated with those activities) are not likely to be as robust in a lower oil price environment.
– U.S. exports to Mexico will continue to increase, as projected demand growth from power plants will continue to outpace Mexico’s domestic production.
– Power sector demand growth driven mostly by coal plant retirements in response to environmental regulations.
North America Natural Gas Market Outlook –Price Trends
© 2015 ICF International. All rights reserved. Section 1, Page 3
4
Gas production from the Marcellus and Utica has grown rapidly and is now greater than Northeast demand, resulting in a displacement of south-to-north pipeline flows and the beginning of reverse flows to the south. In the long-term, the Marcellus/Utica area is expected to become the biggest supply source to North American gas markets.
In contrast, Gulf Coast production has grown much more slowly, while the area’s demands are expected to increase robustly.– LNG export terminals and new industrial facilities will create additional Gulf Coast demand growth.
This supply and demand realignment is changing the pricing dynamics between Henry Hub and the Northeast.– Prices in the heart of the Marcellus production area (e.g., Dominion South Point, Tennessee Z4-300) are
relatively low and there is potential for collapsing prices when infrastructure development lags production.
– On the other hand, during periods of pipeline congestion, prices in some downstream markets (such as NYC and New England) can be relatively high and volatile.
– There is no single market price indicator of the Marcellus Shale. A number of price points are relevant, but no single point within the area rivals Henry Hub as a proxy for a broader market conditions.
– Northeast regional prices will move independent from Henry Hub, driven mostly by Marcellus area dynamics (production growth and localized pipeline congestion) rather than Gulf Coast market conditions.
Marcellus/Utica will become increasingly important in contracting, trading, and supply portfolio considerations.– Market participants should consider the dynamics of Marcellus/Utica prices separately from Henry Hub
prices, as prices in the two areas are likely to continue to be determined by separate forces.
North America Natural Gas Market Outlook –New Dynamic for Gulf Coast versus Northeast Pricing
© 2015 ICF International. All rights reserved. 4
ICF has reduced its near-term oil price projections and expects a slower recovery to the long-term equilibrium marginal production cost of $75/BBL.
– Global oil inventory is increasing.
– Short-term global demand recovery remains pessimistic.
– U.S. oil inventories are rising to unprecedented levels.
© 2015 ICF International. All rights reserved.
Assumed Oil Prices for ICF’s Gas Market Projections
Section 1, Page 5
$0
$10
$20
$30
$40
$50
$60
$70
$80
2015 2020 2025 2030 2035
Refiners’ Acquisition Cost of Crude (RACC), 2014$/bbl
Q2 2015
Q1 2015
Projected Gas Demand
© 2015 ICF International. All rights reserved.
Other
Residential
Commercial
Industrial
Power
LNG Exports
Mexican Exports
0
20
40
60
80
100
120
140
2010 2015 2020 2025 2030 2035
U.S. and Canada Gas Demand, Average Bcfd
Natural gas demand growth is driven by growth in export markets (LNG and Mexican exports), in the next five years.
The power sector is the largest single source of incremental domestic gas consumption in the long-term.
– Between 2015 and 2020, growth is primarily driven by natural gas capacity replacing coal.
– Accelerated growth is expected after 2020 when federal carbon regulation is initiated.
– After 2030, nuclear retirements start a new round of growth.
Section 1, Page 6
Market Assumptions
GDP Growth:
– We include BEA’s March 27th, 2015 GDP growth estimate for Q4 2014 of 2.2%, and no changes for previous quarters.
– The 2015 GDP growth assumptions are based on the Wall Street Journal’s March 2015 Survey of Economists.
• 2015 GDP growth is assumed to average 2.8%.
– From 2016 forward, we assume U.S. GDP grows at 2.6% per year.
Demographic trends are consistent with trends during the past 20 years. U.S. population growth averages about 1% per year throughout our projection.
Future weather is assumed to be consistent with averages over the past 20 years.
© 2015 ICF International. All rights reserved.
Key Assumptions – Macroeconomic
Section 1, Page 8
Current U.S. and Canada gas production is from over 400 trillion cubic feet of proven gas reserves.
The substantial North American natural gas resource base, totaling over 4,000 trillion cubic feet of unproved plus discovered but undeveloped gas resource, can supply the U.S. and Canada gas markets for over 100 years (at current consumption levels).
Shale gas accounts for over 50 percent of remaining recoverable gas resources.
No significant restrictions on well permitting and fracturing beyond restrictions that are currently in place.
No significant hurricane disruptions to natural gas supply. Modest disruptions assumed, consistent with the average disruption over the past 20 years.
Arctic projects (specifically Alaska and Mackenzie Valley gas pipelines) are not included in our projection.
Near-term midstream infrastructure development is aligned with project announcements. Unplanned (“generic”) projects are included when the market signals need of capacity (i.e., projected basis covers the unit cost of expansion). We assume that there are no significant delays in permitting and construction of pipelines.
Key Assumptions – Natural Gas Supply and Midstream Development
© 2015 ICF International. All rights reserved. Section 1, Page 9
Potential Marcellus and Utica Expansions into the Mid and South Atlantic States
In addition to the plans to reverse the Transcontinental Pipeline to flow gas towards Georgia and Alabama, several new pipelines have been proposed to transport natural gas directly from West Virginia into the Mid and South Atlantic States.
Project Name Company RouteCapacityMMcfd
Planed In-Service Date
Status
Virginia Southside Expansion
Williams Transcontinental
Loop of existing lateral for power growth is VA
270 Sep-15Under
Construction
Leidy SoutheastWilliams
Transcontinental
Looping and compression along Leidy line with backhaul along Transco mainline to Alabama
525 Nov-15FERC
Approved
Atlantic SunriseWilliams
TranscontinentalReversal of Transco Mainline
from PA to GA1,700 Jul-17 Announced
Atlantic Coast Pipeline
Dominion, Duke, Piedmont, and AGL
550 Mile green field pipeline through West Virginia, Virginia,
and North Carolina1,500 Oct-18 Announced
Western Marcellus Pipeline
Williams Transcontinental
Clarington OH and Marshall WV to Transco 165 in VA
1,000 2018 Announced
Mountain Valley Pipeline
EQTWest Virginia to Transco Station
165 in Virginia2,000 Oct-18 Announced
© 2015 ICF International. All rights reserved. Section 1, Page 10
Macro Market Trends
Projected Market Growth
© 2015 ICF International. All rights reserved.
U.S. and Canadian Gas Demand (Tcf per year)
Other
Residential
Commercial
Industrial
Power
Mexico Exports
LNG Exports
0
5
10
15
20
25
30
35
40
45
50
2010 2015 2020 2025 2030 2035
By 2035, U.S. and Canadian gas consumption is projected to increase by nearly 14.5 Tcf (+39.5 Bcfd), versus today’s level, exhibiting an average growth rate of roughly 1.8% per year.
– Roughly 45% of the growth comes from the power sector, which grows to about 16 Tcf (43 Bcfd) by 2035.
Gas exports also create significant demand growth.
– LNG exports reach 4.1 Tcf(11.2 Bcfd) by 2025.
– Mexican Exports grow to 2.4 Tcf (6.7 Bcfd) by 2035.
Section 1, Page 12
Projected Exports
Since 2012, DOE has approved non-FTA exports for 7 U.S. LNG terminals: Sabine Pass, Freeport, Lake Charles, Cove Point, Cameron LNG, Jordan Cove, and Oregon LNG.
– ICF’s current projection assumes U.S. LNG exports reach 9.1 Bcfd by 2024.
– LNG exports from British Columbia are delayed by 2 years relative to ICF’s Q1 2015 projection, and projected to reach 2.1 Bcfd by 2025, due to reduced oil prices.
Recent growth in Mexican exports have been driven by increases in Eagle Ford production and growth in Mexican gas use.
– Mexican gas demand is being driven by replacement of oil-fired generation.
© 2015 ICF International. All rights reserved.
0
2
4
6
8
2010 2015 2020 2025 2030 2035
US Exports to Mexico (Average Bcfd)
California West Texas/New Mexico Arizona South Texas
Section 1, Page 13
US Gulf Coast
US East CoastBritish Columbia
0
2
4
6
8
10
12
14
2010 2015 2020 2025 2030 2035
LNG Exports (Average Bcfd)
Regional Demand Across the U.S.
Regional growth in gas demand is primarily due to increased gas use for electric generation.
The largest increase occurs in the South Atlantic region, with 3.5 TCF growth in annual demand.
Significant growth in the Mid-Atlantic and East North Central regions, mostly driven by coal plant retirement.
Western demand relatively flat due to DSM, energy efficiency efforts, and ambitious renewable portfolio standards.
© 2015 ICF International. All rights reserved.
Annual Tcf
0.0 0.0
3.2 3.2
0
2
4
6
8
10
2009 2015 2025 2035
Gulf Coast LNG Exports
0.0 0.0 0.1 0.1
0
2
4
6
8
10
2009 2015 2025 2035
US East Coast LNG Exports
0.3 1.02.2 2.4
0
2
4
6
8
10
2009 2015 2025 2035
Exports to Mexico
Section 1, Page 14
0.0 0.0 0.0 0.00
2
4
6
8
10
2009 2015 2025 2035
US West Coast LNG Exports
Regional Supply Across the U.S.
Areas with the greatest growth in production are the West South Central and the Mid Atlantic.
– These areas have high concentrations of shale resource development.
South Atlantic and East North Central production increases due to growth of the Marcellus and Utica shale plays in West Virginia and Ohio.
Gulf of Mexico production (included in WSC and ESC) continues a near term decline, but long run increases in Deep Water plays will offset declines in Shallow Water production, yielding modest increases in the longer-term.
© 2015 ICF International. All rights reserved.
Annual Tcf
Section 1, Page 15
Projected Regional Results
Regional Outlook – Marcellus/Utica Producing Area (Includes Northeastern and Western PA, East OH & WV)
Robust supply growth continues as the Marcellus and Utica continue to be the single largest producing area in North America. The area is the most cost-effective production area in North America.
Significant consumption growth attributed to coal plant retirements and incremental lease and plant gas use as production grows.
Area’s prices continue to remain well below Henry Hub, fostering significant pipeline development.
© 2015 ICF International. All rights reserved. Section 1, Page 17
-1.50
-1.00
-0.50
0.00
0.50
2010 2015 2020 2025 2030 2035
Basis versus Henry Hub (2014$/MMBtu)
Dominion South Point Columbia Appalachia Leidy Hub
Residential, Commercial,
Industrial
Power Generation
Other*
0
1
2
3
4
5
6
7
8
2010 2015 2020 2025 2030 2035
Annual Demand (Average Bcfd)
Other
Marcellus
Utica
0
5
10
15
20
25
30
35
40
45
2010 2015 2020 2025 2030 2035
Annual Indigenous Supply (Average Bcfd)
* Other includes pipeline fuel, lease and plant gas use
Regional Outlook – Gulf Coast (Includes Southern LA, MS , AL & GOM Offshore)
Gulf of Mexico production is likely to experience a modest rebound as gas prices firm above $5 per MMBtu.
But, the area’s demand growth, including LNG exports, is likely to significantly outpace production.
The area’s demand growth, coupled with broader market growth across North America, will place significant upward pressure on Henry Hub price, particularly between 2016 and 2020 when petrochemical load and LNG exports are growing.
Basis to points that are more remote to the area’s production, for example, Transco Station 65 is likely to increase along with market growth.
© 2015 ICF International. All rights reserved. Section 1, Page 18
Residential, Commercial,
Industrial
Power Generation
Other*
LNG Exports
0
2
4
6
8
10
12
14
16
2010 2015 2020 2025 2030 2035
Annual Demand (Average Bcfd)
Offshore
Onshore
0
2
4
6
8
10
12
14
16
2010 2015 2020 2025 2030 2035
Annual Indigenous Supply (Average Bcfd)
0
2
4
6
8
-0.05
0.00
0.05
0.10
0.15
2010 2015 2020 2025 2030 2035
Henry Hub Price & Basis versus Henry Hub (2014$/MMBtu)
Transco St 65 Henry Hub Price
* Other includes pipeline fuel, lease and plant gas use
19
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Petrochemical Focus
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