For a time after crude oil prices crashed in 2014-15, the Marcellus/Utica Shale — and also the Permian Basin to some degree — had something of a monopoly on natural gas production growth in the Lower 48. With oil prices lagging behind $50/bbl, associated gas from crude-focused plays were either in decline or, at best, in a holding pattern. But now with crude above $50 and gas above $3.00/MMBtu, just about all the major basins — including Permian, SCOOP and STACK, even Haynesville — are growing again. Nearly all of the new supply is targeting the Gulf Coast, hoping to capture market share of burgeoning export demand from the region. But not all of that supply will be able to get to where the demand is, which means, supply competition for transportation capacity and demand is bound to heat up. Today, we wrap up a blog series on our U.S. gas supply and demand outlook, in particular how we see these dynamics will shake out over the next several years.
In Part 1 of this blog series, we began with a supply outlook based on RBN’s Production Economics and Production Forecasting Models. We found that at $50-something crude and $3.00/MMBtu gas (our “Growth Scenario”), producers are likely to ramp up production in both crude-focused and gas-dominant plays. Specifically, if crude prices climb to $57/bbl, crude production would increase to 11.2 MMb/d by 2022. On the natural gas side, given the associated gas production growth from crude-focused regions and with gas at $3/MMBtu (also the Growth Scenario), Lower-48 natural gas production would balloon to 92 Bcf/d by 2022.
Next, in Part 2, we stacked up the expected demand growth that could balance all that new gas supply, and found that while U.S. consumption for industrial and power generation use will soak up some of that gas, the majority of it will come from exports and nearly all of it will be located in the Gulf Coast region. We expect U.S. LNG export capacity to reach nearly 11 Bcf/d by the end of 2019, from just over 3.0 Bcf/d today. At an average utilization of 85% to 90%, that translates to just under 10 Bcf/d of new demand. Exports to Mexico will come at a slower pace due to demand and takeaway constraints south of the Texas-Mexico border, but by 2022 will add another 8.0 Bcf/d of demand.
We walked through the resulting supply and demand balance in Part 3, after factoring all components — including imports from Canada. That calculation led to the conclusion that total supply and demand will tie up and balance, but so tightly as to leave the balance vulnerable to oversupply conditions. The problem, as we laid out in Part 4, is that supply is growing in all the major basins now, and almost all of the new production is targeting the same demand — LNG and Mexico exports from the Gulf Coast region — via many of the same transportation routes. That sets the stage for two types of potential constraints for producers: transportation and demand.