Natural Gas a Powerful Force, Despite Industry Headwinds

Gas prices remain low worldwide, and the challenge for producers is to find a market for their supply. Gas remains the No. 1 source of U.S. power generation, and will continue in that spot for several more years, but the rise of renewables threatens gas’ market share, just as it has coal and nuclear power.

There is plenty of natural gas in the U.S., and indeed the world. Prices for the fuel continue at historic lows, with weeks at levels below $2/MMBtu in the U.S., as the supply of gas has far outstripped demand.

That’s good news for natural gas customers, not so good for natural gas producers. And while natural gas is the leading fuel when it comes to power generation in the U.S.—the Department of Energy said it accounted for about 37% of electricity produced last year—it is lower prices for other energy sources, notably renewables such as solar and wind power, that threaten its market share. The U.S. Energy Information Administration (EIA) said recently that electricity generated by renewable energy will surpass natural gas generation in 2045; some industry analysts have said they expect that to happen sooner.

The economics of power generation have changed rapidly as the cost of renewable power falls, and as environmental regulations that impacted the profitability of coal-fired plants increasingly target gas-fired units. States such as California, while keeping gas plants open in the short term, are unlikely to approve new facilities. Cities across the U.S. are banning gas connections for new homes and commercial buildings as part of a move toward electrification, directly impacting utilities serving gas customers and closing a market for the fuel.

Gas plants are still being built; data from S&P Global Market Intelligence and the Sierra Club last year showed more than 170 natural gas plants have either been planned or proposed across the U.S. About 150 of those are scheduled to open between now and 2033, though not all have specified locations. And because utilities have to plan for new facilities years in advance, it’s likely those plans will change.

The glut of gas has led to companies idling drilling rigs, filing for bankruptcy protection, and watching the value of their assets in shale fields plummet. EQT, the largest producer of U.S. natural gas, plans to write down the value of its assets by as much as $1.8 billion. Chevron, the country’s second-largest oil and gas giant after ExxonMobil, in December announced it would write down $10 billion to $11 billion in assets, including holdings in oil and gas fields in Appalachia, and a planned liquefied natural gas (LNG) export facility in Canada.

“The low cost of natural gas today is very difficult for a large number of producers,” said Stephen Davis, a partner with Akin Gump, a law firm that specializes in the natural gas industry, in an interview with POWER. “We’ve seen an increase in the number of bankruptcy filings, and restructuring.”

Banks that earlier had ended investments in coal-fired power are now doing the same with natural gas. JP Morgan Chase in late February said it will end or phase out loans to some fossil-fuel interests, an announcement just days after the bank’s own economists warned that the climate crisis presents a financial and reputational risk to the firm. BlackRock, the world’s largest asset manager, in January said addressing climate change is central to its investment strategy, and said it would pressure other companies to reduce their exposure to fossil fuels.

Davis acknowledged the headwinds facing the industry, but said, “I don’t think the natural gas industry is going away anytime soon,” even as he agreed power generation from renewables will eventually surpass gas-fired generation. “I think that largely depends on technology improvements in the solar and wind space. I think we’ll see better battery storage improvements. But I have an optimistic view of the future for natural gas, and of the fossil fuel industry.” He said gas, because of its abundance, could help developing countries increase their population’s access to electricity. “I think the fossil fuel industry has a great capacity for doing that,” Davis said.

Finding Ways Out of a Financial Morass

Analysts who talked with POWER said natural gas is likely to suffer, particularly in the U.S., as costs for renewable power fall and environmental regulations increasingly target gas. And while the U.S. is exporting more of the fuel, including LNG as more export terminals come online, growing production of natural gas in countries such as Russia and Australia will likely depress international prices over the next few years.

Salvatore Minopoli, vice president of Highview Power USA, in a recent interview with POWER put it bluntly: “Natural gas is dead,” he said, citing market and regulatory forces that support the development of renewable energy. “It’s a money thing. The economics do not make sense to build new fossil-fuel plants.”

A Moody’s Investor Service report said several oil and gas companies exploring in the Marcellus Shale face heightened financial risks in the next few years due to accumulated debt. Moody’s said that between 2021 and 2023, Antero Resources, CNX Resources, EQT, and Gulfport Energy will need to refinance between $3.5 billion and $4 billion in debt. The report said in total, the producers will have to repay lenders more than $12 billion in that stretch.

“Everyone believes we have plenty of natural gas, we have more than enough,” said Clark Sackschewsky, the Houston, Texas-based national leader of BDO’s Natural Resources practice. “Demand hasn’t really changed, people realize the supply side is very abundant, they can use it as much as they want. Until demand increases, we’re still going to be in a depressed [price] environment. The industry is still trying to figure out how to live in that environment. There’s still oil and gas out there, it’s still valuable, but you no longer can drill your way to success. It’s going to require more digital processes, more AI [artificial intelligence], looking at things from a more intellectual standpoint, rather than just we can drill our way there.”

Morgan Stanley in a 2019 report estimated demand for natural gas will fall about 13% this decade as utilities add more renewable resources. The report also noted that future regulations, or the move to a carbon tax, along with concerns about climate change, will support more generation from renewables.

Could anything help gas prices in the short term? “We could see a sharp price pop on a combination of weather-induced demand this summer and an economic recovery, provided global economic conditions don’t deteriorate for too long,” Brian Milne, an editor and analyst with DTN, which provides business and market intelligence, told POWER. “Speculators are net-short natural gas futures. If the bearish sentiment continues, and we see a surge in demand during the second half of the year, we could see a short covering rally that pushes the futures contract above $2.50/MMBtu.”

Still Part of the Generation Transformation

Analysts agree the future is murky for natural gas, while acknowledging low prices for the fuel will keep it part of the power generation portfolio.

“I think natural gas is going to be that transition fuel away from coal, at least as long as the technology continues to develop out on the renewable side,” said Sackschewsky. “With the price of gas below $2, you can’t ignore it. It makes sense to move from coal into natural gas, not just because it’s cleaner, but it’s also more economic. With additional pipeline infrastructure being built to get gas to market, the next step in the evolution of power generation begins with natural gas.”

Newer turbine technology will make gas generation more efficient. GE in October 2019 unveiled the 7HA.03, the newest model in its high-efficiency air-cooled (HA) turbine line for the 60-Hz market. GE said Florida Power and Light’s Dania Beach Clean Energy Center will be the first plant to use the new turbine, with two units set to begin commercial operation in 2022. Siemens in February announced a milestone for its H-class turbine, the SGT5-8000H, which it said has now surpassed 1 million hours of commercial operation for the 50-Hz market.

1. The 1,588-MW Greensville County Power Station, a POWER Top Plant in 2019, uses three Mitsubishi Hitachi Power Systems M501J advanced gas turbines. The M501J turbine, with a 15-stage axial flow compressor, can operate at 1,600C inlet turbine temperature, and provide up to 64% net thermal efficiency in combined cycle operation. Dominion Energy said the station’s air permit has the strictest CO2 limits of any U.S. plant.  Courtesy: Dominion Energy

Mitsubishi Hitachi Power Systems (MHPS) continues to deploy its J-series turbines for both the 60-Hz and 50-Hz markets. Three J-series turbines are in use at Dominion Energy’s Greensville County Power Station in Virginia (Figure 1), a POWER Top Plant in 2019.

The EIA in its recent Annual Energy Outlook 2020 said, “Natural gas used for U.S. electric power generation peaks in 2021 as relatively low natural gas prices, new natural gas-fired combined-cycle capacity, and coal-fired capacity retirements drive increases in natural gas-fired generation in the short term. However, strong growth in renewables and efficiency improvements in the remaining coal-fired fleet lead to declining amounts of natural gas consumed in the electric power sector through 2030. Natural gas consumption then slowly rises to reach its 2021 level again in the late 2040s.” The EIA in recent reports has repeatedly said combined cycle gas-fired power plants, and solar and wind projects, would drive new U.S. power generation over the next several years.

Quest for New Markets

Finding new markets for U.S. natural gas, absent widespread development of new gas-fired power plants, is a challenge for producers. Rob McBride, senior director of Strategy and Analytics for Enverus Energy, told POWER that “[LNG exports] and exports to Mexico” are likely the best markets for U.S. gas at present.

2. Analysts who spoke with POWER think more tankers carrying LNG will be in service as the market remains strong for the fuel for use in power generation. According to the Federal Energy Regulatory Commission, there are seven LNG export terminals currently operating in the U.S., with eight more approved and under construction as of mid-March 2020. Source: U.S. Department of Energy

“There is little reason to believe there are large, steep increases in domestic demand on the horizon,” McBride said. “U.S. demand will grow [in electric generation and industrial] but not nearly at the rate that U.S. supply is capable of growing. There is plenty of spare capacity on the U.S. side of the border available to ship south. As infrastructure continues to develop in Mexico, expect those exports to increase. Additionally, LNG [Figure 2] will play a large role in clearing the market, particularly if demand growth expectations from India and China continue as expected. Currently, the world is awash in LNG from the U.S., Australia, and Qatar, which makes it difficult for any additional planned project to reach FID [final investment decision]. It is challenging to secure the long-term offtake commitments necessary to finance a new build. However, if demand catches up, there will be a need to expand export capabilities.”

Farhan Mujib, president of Hydrocarbons Delivery Solutions for Houston, Texas-based KBR, told POWER, “The U.S. remains one of the most attractive sources for LNG export due to the abundance of natural gas, stable regulatory requirement [with the exception of tariffs], and its low cost to develop LNG export facilities compared to Australia, Canada, and other developments in Africa. In addition, the proximity to Europe and their curtailment of coal and nuclear-based power generation provides a great market for cheap LNG exports from the U.S.”

Mujib continued: “I believe LNG will remain strong for the next 15 to 25 years as the most cost-effective and environmentally friendly fuel with new technologies on carbon capture being deployed to minimize or eliminate emissions.”

“If the best market for U.S. natural gas producers is defined by most potential for growth, then LNG exports will likely be the best market for the foreseeable future,” Michael Sloan, senior director of energy markets at ICF, told POWER. “Over the next 10 years, most of the growth in natural gas demand is likely to come from LNG exports. ICF forecasts that LNG export feedgas demand will grow at an annual average rate of 13%, adding nearly 13 Bcf/d [billion cubic feet per day] of new demand over the next 10 years. Also, natural gas exports to Mexico via pipelines will increase by about 2 Bcf/d over the next decade.”

A recent report from IHS Markit says 2019 was a record-breaking year for the LNG industry. The report highlights what it calls a “sustained growth trend” for LNG, with global LNG capacity expected to show a 50% increase this year from 2015 levels—from 283 million metric tons per annum (MMtpa) in 2015 to 437 MMtpa in 2020.

“The ongoing pace of new investment is especially noteworthy considering a market context of weak global prices,” said Michael Stoppard, chief strategist, global gas at IHS Markit. “Not only did LNG grow at an unprecedented rate in 2019, but the industry also laid the foundations for continued strong growth into the middle of the decade.”

The International Energy Agency (IEA) in a recent report provided a note of caution. “There is significant uncertainty as to the scale and durability of demand for imported LNG in developing markets around the world,” the IEA said. The agency noted the high cost of processing and transporting LNG, and said, “competition from other fuels and technologies, whether in the form of coal or renewables, loom large.”

New Plants Centered in Southeast Asia

Industry experts agree that most new gas-fired plants will be located outside the U.S.

“The pace of coal-to-gas conversions will likely slow over the next five years, but has been robust, with 5% of existing U.S. coal capacity retired in 2019, according to government data,” said Milne. “Decarbonization efforts by several states will limit the growth in fuel switching in parts of the Northeast, but mid-Atlantic states that continue to depend on baseload coal-fired electric generation will support the conversion. Low natural gas prices amid an abundance of supply underpin support for fuel switching in the United States. Globally, look to Asia for growth in coal-to-gas conversions because of economic and environmental reasons.”

“China wants to grow its gas share of total power dramatically over the next decade in order to try and improve its air quality. India has ambitious targets as well,” Adam Rozencwajg, managing partner at Goehring & Rozencwajg Associates, told POWER. “These will be the largest sources of demand globally.”

“There is a future for gas-fired generation in the U.S., but it will be limited,” said KBR’s Mujib. “The next wave of gas-fired combined cycle power plants will be in developing countries like India, Pakistan, Bangladesh, and also countries like China switching from coal to gas and in the Middle East switching from oil to gas.”

As for renewable generation replacing gas-fired power? Not everyone shares that view.

“Renewables cannot serve as baseload power because they are intermittent,” Rozencwajg told POWER. “They cannot work at scale without some sort of battery backup and we do not see any of the solutions as being economic today or in the future. Instead, we think gas will be the bridge fuel to nuclear power, which is both baseload, clean, and achievable with today’s technology.” ■

—Darrell Proctor is associate editor for POWER (@DarrellProctor1, @POWERmagazine).