Golden Years: The Golden Age of U.S. Natural Gas Part IV—How Much Supply Is Reasonable to Expect, and Why?

As we move into the Golden Years of U.S. natural gas, it is important to understand the long-term sustainability of such a large expansion to U.S. natural gas supplies and their uses.  Our strong conclusion is that US natural gas supply will comfortably meet expected increases in demand in the years out to 2025. And that is important, because if the rapid expansion of demand, including hotly debated sectors like LNG exports, really did start putting strain on the nation’s gas supplies, prices could be higher going forward. But if sufficient confidence exists in the ability of producers to supply enough gas to meet plausible demand scenarios for a long time to come, then stable prices can be expected (and are), which will allow some industrial demand projects to actually get built. Today’s blog concludes our series on natural gas supply and demand.

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This is the fourth installment in our series analyzing the overall nature of the natural gas surge in supply and demand, as to whether the natural gas renaissance is real and sustainable, with plenty of natural gas at reasonable prices. In Part I “Golden Years: The Golden Age of U.S. Natural Gas,” we tackled the history of industry regulation before the shale era. In Golden Years:  The Golden Age of U.S. Natural Gas Part II—How Much Gas Do We Need?, we developed a reasonable demand scenario out to 2025.  Our total U.S. demand estimate of 92.5 Bcf/d represented an upward adjustment of 15.5 Bcf/d over EIA’s 2013 estimate (77 Bcf/d).  In Part III we showed how Energy Information Administration (EIA) estimates of supply—even though they increased in a new, updated forecast —seem still to be much lower than reality (see Golden Years:  The Golden Age of U.S. Natural Gas Part III—How Will Producers Supply Expanding Demand?).

Just to clarify our basic notion in this series, we are not saying that natural gas prices will never increase.  In fact, the production scenario that we’ve presented assumes that prices will be somewhat higher going forward than they have been for the last couple of years, high enough to attract drilling rigs back from oil plays to gas plays to resume some significant portion of the large gas-directed drilling programs that were in effect until 2012, when the “call of the oil” brought about a major shift in the drilling population away from natural gas.  Today’s benchmark Henry Hub natural gas price bounces around between $3.50 and $4.50/MMBtu,  Prices between $4.50 and $5.00, are what we believe are needed and are a level that could remain stable for a long time.  EIA’s Annual Energy Outlook for 2013 (AEO2013) forecast constant-dollar prices that did not break $5.00/MMBtu until after 2025.  The more recent early release of the Annual Energy Outlook for 2014 (AEO2014 ER) shows higher demand and higher supply, but then forecasts prices about 30 cents higher than AEO2013 at $5.30/MMBtu.   Results to date suggest that the AEO2013 price forecasts are high enough to bring producers back to drilling for shale gas.

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