Natural gas demand will push price to $5, analyst says

Pearce Hammond, managing director for Simmons & Co. (Emily Pickrell/Houston Chronicle)
Pearce Hammond, managing director for Simmons & Co. (Emily Pickrell/Houston Chronicle)

Potential exports and increased transportation and industrial use of natural gas will continue to push natural gas prices up to more sustainable prices, experts said Tuesday morning at a energy conference in Houston.

Electric power generation, heavy truck transportation and industrial projects on the Gulf Coast are all making significant shifts towards natural gas – a transition which will continue to push up the price of natural gas, said Pearce Hammond, managing director of Simmons and Co., speaking at a Global Energy Conference sponsored by Mayer Brown.

Liquefied natural gas also will begin to be exported in 2016, when Cheniere Energy starts up its export facility in Sabine Pass, and natural gas exports to Mexico and Canada via pipeline will likely grow in the coming years.

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Assuming that oil prices stay close to $100 per barrel, this increased demand is expected to push natural gas prices up to at least $5 per million British thermal units, Hammond said.

“I don’t think you meet this demand with four dollar natural gas – a lot of demand is coming,” Hammond said. “The price necessary to get the gas out of the ground is higher than four dollars. It doesn’t mean it’s six dollars but it is probably around five dollars.”

The price of natural gas has climbed over the last year has climbed from an average price of $2.79 per million British thermal units in 2012 to $3.76 per million Btu in 2013 to date.

Producers are producing roughly the same amount of natural gas, even though the number of rigs have dropped by about 600 rigs in 2013 from its high in 2011.

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Hammond said the drop in rigs has been driven both by increased drilling facilities and by relatively low natural gas prices. While the price of natural gas has increased in the last year, many producers are choosing only to drill in the most economically advantaged plays until the price increases to $5.

Electric power generation is expected to drive this growing demand, as older coal plants are retired and replaced with more efficient and cheaper natural gas plants. While a full transition to coal is not expected, the new plants will create an additional four to six billion cubic feet of natural gas by 2020, Hammond said.

Exports of liquefied natural gas, which has been a hot political topic in 2013, also are expected to increase demand by two to three billion cubic feet by 2020. Currently, only Cheniere Energy’s facility at Sabine Pass has been authorized for exports when construction is completed in 2016. However, Hammond said that he anticipates that other authorization for proposed export terminals at Freeport in Texas and Cove Point in Maryland will soon follow.

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Hammond said that while the price will eventually settle around five dollars, as demand continues to grow throughout the decade, there will be a short-term price swell to a ramped up production of natural gas.

“I am going to bet that it is not going to be an orderly transition – there will be dislocations,” Hammond said. “The price signal will probably move higher rather than lower to incentive these producers to provide all of the natural gas that is demanded.”

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