Oh US gas demand, where art thou?

In the United States, natural gas is having quite a year. Year-to-date, Platts unit Bentek Energy data shows natural gas production has averaged 72.4 Bcf/d, a 5.2 Bcf/d, or almost an 8% increase, from a year ago. This growth is impressive itself, but what makes it even more impressive is the growth has come while prices have been depressed and demand has lagged.

For example, year-over-year:

• Platts assessed spot prices at Henry Hub in June have averaged $2.65/MMBtu, which is more than a 40% decline from a year ago, when the June 2014 price average month-to-date was $4.59/MMBtu.

• Baker Hughes shows US natural gas drilling rigs have fallen by nearly a third, from 320 to 222.

• Baker Hughes shows US oil drilling rigs have fallen by over half, from 1,536 to 642. (This is important because associated gas from crude oil wells account for about for about 10 percent of total natural gas production.)

So why have prices and rig counts fallen so precipitously? One thing is for sure: Demand. Put simply, demand has failed to keep up with supply. While natural gas supply has grown 5.2 Bcf/d in 2015, demand has only risen by 900 MMcf/d.

But how can this be? What about all the headlines that discuss coal-to-gas switching, coal retirements, and new power burn demand? Put simply, it takes a lot to move the needle when it comes to natural gas demand. Let’s take a closer look some of the issues that folks thought would push up demand, but have yet to do so.

Coal retirements

In 2005, the US generated just over 2 billion Mwh of electricity from coal. At that time, natural gas was responsible for a measly 760 million MWh, roughly 40% of coal’s contribution. The Energy Information Administration’s data through first quarter of 2015 shows that natural gas now contributes 80% of coal’s contribution.

The US Energy Information Administration has projected that almost 16 GW of generating capacity is expected to retire. Roughly 80% of the capacity set to retire is coal-fired generation. Coal major Arch Coal expects that 60 GW of coal capacity will be retired by 2018. This only tells half of the story, though. The other half of the story that isn’t discussed enough is capacity factor — how often a plant is utilized. In 2014, the average capacity factor for US coal units was 61%, according to Bentek estimates. The coal units that are set to retire in 2015 had an average capacity of just 36%. All together, the coal capacity expected to retire in 2015 accounted for just 1.6% of total US generation in 2014.

In all, Bentek estimates incremental power burn opportunities should be around 900 MMcf/d of new gas demand this summer.

Power burn

The markets and producers have been hoping for a strong power burn this summer. In June, US power burn has averaged 26.1 Bcf/d, which is 2.1 Bcf/d higher than this time a year ago, Bentek data shows. Unfortunately, this gain has been almost completely offset by residential/commercial and industrial demand, which has fallen 1.8 Bcf/d and 100 MMcf/d, respectively year-to-date.

Industrial demand

Although industrial demand is down year-to-date, US industrial demand is expected to grow over the remainder of the summer and into next year, as several projects are expected to come online. This summer (April through October), Bentek said demand is expected to average 19.4 Bcf/d, or 130 MMcf/d higher than 2014 levels. Over the next 12 months, the petroleum and refinery industry is expected to grow by as much as 244 MMcf/d.

One project that could actually move the needle in regards to new demand is Cheniere’s Sabine Pass LNG export project. The first LNG cargo for export is planned to take place this December. The project is expected to build six trains that would be capable of exporting approximately 3.8 Bcf/d.

Looking ahead

The market has been taking notice of which prices producers continue drilling at, as well while also looking at what prices generators change their fuel source to natural gas. As of June 11, Platts assessed a national average price of $2.74/MMBtu in the cash market. Although production has impressively grown in this low price environment, a sustained low price environment could eventually stymie natural gas production growth — and it could incentivize new demand.

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