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With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing?
Executive Agenda
Despite all the talk about shale gas developmentthe potential environmental consequences of
hydraulic fracturing, the potential to replace coal with gas for generating electricity, the potential
for the United States to export liquefied natural gas (LNG)none of it addresses the bigger
picture: The market is structurally out of balance, and it cant stay this way. The technological
triumph of shale gas has led to production that far outstrips demand, and if this were a normal
market, price and demand shifts would have already delivered a quick rebalancing.
But shale gas is not a normal market and a rebalancing is not likely in this complex ecosystem
where a wide array of players have diverging incentives and investment horizons. Over the past 20
years, gas prices have fluctuated between $2 and $15 per million BTU. At the low end, the producers are not viable, and at the high end, potential users of gas cannot afford to use it. Will we face
more years of such fluctuations before achieving balance, especially since numerous decisions
affecting that balance are still up in the air? And yet, bets must be placed now. Infrastructure must
be built. With fortunes to be made or lost, these decisions must be as informed as possible.
Executive Agenda
Independent producers focus on short-term plays and have an investment time horizon
of just a few years. They are not afraid to take risks, have few barriers to entry, and can bring
on capacity quickly and inexpensively. But if gas prices stay below $4 per million BTU, many
players with predominantly dry gas portfolios will continue to struggle and possibly go out
of business.
Super majors and global producers take a longer view on their investments and can afford to
delay investment in certain parts of the world if local conditions are not favorable.
Midstream players have a longer view on investments, but they take advantage of geographic
and capacity-based market differentials to invest in pipelines, gas processing, and fractionation.
Gas exporters are eyeing liquefaction facilities on the coasts that could competitively export
LNG and take advantage of high prices abroad if the price spread between the United States
and overseas markets stays above $5. Although 4.5 trillion cubic feet of capacity has been
proposed, these facilities could cost up to $10 billion per trillion cubic foot and take a minimum
of five years to permit and build.
Chemical companies are looking at natural gas liquids (NGL) as feedstock. Low-cost ethane
(as a substitute for byproducts of crude oil refining), for example, makes polyethylene cheaper
to produce in the United States than anywhere in the world except the Middle East. So the
industry could build eight to 10 (or more) new gas crackers at approximately $2 billion apiece,
including some downstream investments, but it would need confidence in ethane prices
being competitive for 10 or more years.
With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing?
Executive Agenda
With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing?
Executive Agenda
Although the free-markets scenario is the most likely in our analysis, the outcome of global
events and governmental actions could lead us down other paths. There are four other
possible scenarios:
Troubled times. A geopolitical event triggers a disruption in oil supply, sending oil prices up
and the global economy into a double-dip recession. Natural gas demand collapses to 20
percent below the free-market scenario level.
Limited export. The U.S. government decides to limit natural gas exports and provides support
for other fuels in an effort to achieve energy independence, thus depressing natural gas demand.
Global gas competition. Other major economies are successful in developing wet shale plays.
As a result, demand falls for both LNG exports and ethane-based chemicals from the United
States, challenging the overall economics of shale gas plays in North America.
High output. Robust global GDP growth and lack of global shale developments lead to the
highest level of U.S. natural gas demand.
These scenarios represent a combination of various, and sometimes drastic, supply and
demand discontinuities. Nevertheless, the resulting gas prices are spread across a surprisingly
narrow range of $5 to $8 per thousand cubic feet (mcf) (see figure). We believe market trends
point to a strong future for natural gas and its ability to pull prices up structurally, with upstream
production economics determining the floor price and competition between coal and gas
defining the ceiling price.
Figure
Natural gas 2020 price scenarios
Natural gas price ($/MMBtu)
$12
$11
$10
Global economies
collapsing
Demand for natural
gas slowing
Natural gas
restrictions increasing to stimulate
domestic economy
Competition from
coal-fired power
generation
Domestic demand
moderating at high
NG prices
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Troubled times
Limited export
Global gas
competition
Free markets
CO2 regulations
favoring gas
No major global
shale developments
GDP growing
New demand
channels emerging
for GTL and CNG
High output
Notes: MMBtu is one million British thermal units, GDP is gross domestic product, NGL is natural gas liquids, LNG is liquefied natural gas,
GTL is gas to liquids, and CNG is compressed natural gas.
Source: A.T. Kearney analysis
With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing?
Executive Agenda
Finding Balance
One of the biggest difficulties in looking forward is knowing when a current trend represents
lasting change and when it is merely a bump in the road. Shale gas represents lasting change,
but every change has many paths to balance. And on the road from here to long-term balance,
there will undoubtedly be many short-term irritationsa mild winter, a Middle East crisisthat
will send some analysts to wrong conclusions.
Authors
Patrick Haischer, partner, New York
patrick.haischer@atkearney.com
With Fortunes to Be Made or Lost, Will Natural Gas Find Its Footing?
Executive Agenda
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