After the current crop of LNG terminals and ethane crackers is completed in 2020, demand for natural gas will flatten and dry shale gas from plays such as the Marcellus Shale will have to compete against "free" gas associated with oil plays such as Texas' Permian Basin, Sanford C. Bernstein & Co. LLC predicted Feb. 23.
The additional gas with slack demand will keep Henry Hub prices below $2.50/MMBtu from 2021 to 2025, throttling growth in dry gas shale plays from Arkansas' Fayetteville Shale to Appalachia's Marcellus Shale, the Bernstein team, led by gas analyst Jean Salisbury, said in a research note.
"The major drivers of demand growth — LNG export capacity build, ethane cracker builds at home and abroad, and the gasification of Mexico's power grid come to an abrupt stop at the end of 2020," Bernstein said. "At the same time, our associated gas forecasts, led by the Permian, just keep getting stronger. The fact that gas (and NGLs) are a byproduct for most of what is coming online today is terrifying if you believe in a flat demand market for five years."
Associated gas from oil plays, primarily the Permian Basin, will grow to 10.8 Bcf/d by 2021 to 2025, well in excess of 3.2 Bcf/d in expected well declines and 5 Bcf/d of demand growth from Mexico, LNG exports and ethane crackers, Bernstein said. "At our expectations of oil price, there will be enough 'free gas' to cover all demand needs." The Bernstein team expects West Texas Intermediate crude to average $50 per barrel in 2018, growing to $58/bbl in 2019.
The supply shock benefits utilities and consumers as gas burned for power will remain cheap. LNG spot market buyers will also benefit from low Henry Hub prices, Bernstein said, while LNG's position as a balancing force in the natural gas supply/demand equation grows.
After a rush of final investment decisions to build LNG terminals in the U.S., new projects will dry up after 2020. Growth in exports to Mexico also starts to flatline after 2021 as gas fills a 70% share of Mexico's power demand, from 51% in 2015, and nearly eliminates coal and oil as competing resources, Bernstein said.
The other driver for shale drilling, ethane demand, also flattens after 2022 as fewer ethane crackers, which produce petrochemicals from gas, are scheduled to come online. "Ethane crackers after 2020 [with a final investment decision] are less than a third of the capacity of the 2017-20 wave," Bernstein said. "This will drive ~0.5 Bcf/d of gas versus the ~2.2 Bcf/d of crackers in the first wave."
With production outpacing an expected 1.2% cumulative annual growth in demand in 2021 through 2025, driven primarily by the more than 10 Bcf/d of associated gas flowing into the market, drillers will be forced to dump their excess gas on power producers, the analysts said.
"The balance of natural gas will likely be used for electricity generation, which remains the most price sensitive portion of demand," Bernstein said in the note, adding that the only way to generate more demand for gas-for-power is for gas prices to stay low, which is good news for utilities but not so good for shale gas drillers.
"There is little room left for growth from the non-oil associated gas basins including the Marcellus, Haynesville, Fayetteville, and non-condensate Western Canada," while, at the same time, there will be less pressure to build more takeaway capacity in the Marcellus after the current buildout ends, Bernstein said. "Will there be a need to get incremental growth from the Marcellus? Not if this associated growth continues."