1、Commodities ResearchNorth American Natural Gas and Power22 January 2013Gas and Power Kaleidoscope2014: Back to the futureBiliana Pehlivanova+1 212 526 Shiyang Wang+1 212 526 The structural tightening of balances that is taking place this year is poised to persistinto 2014. We expect continued decli
2、nes in net imports and strong growth ofindustrial demand. The need for coal-to-gas displacement is reduced, yet it remains aprominent feature of the markets in 2014. This allows for prices to recover, but only marginally, as they need to maintain abalance between coal-to-gas displacement needs and d
3、rilling economics. A modestrecovery of prices leads to an uptick in drilling, which arrests production declines andputs lower-48 dry gas output on a modest upward trajectory y/y. We expect naturalgas prices to average $4.10 in 2014. 2015 is set to see the unravelling of several dynamics that will ca
4、use balances totighten further, and likely at a greater pace than the tightening we expect in 2014. Yet,with coal-to-gas displacement estimated at a hefty 2.3 Bcf/d in 2014, balances areunlikely to tighten sufficiently to take gas out of the coal stack altogether. This meansthat, once again, natural
5、 gas prices will be bound by coal displacement and drillingeconomics in 2015, albeit at higher levels than our 2014 price forecast.CHART OF THE WEEKLower-48 coal displacement and supply/demand changes, 2014 vs. 2013,3.53.02.52.01.51.00.50.0,Bcf/d,2013 Implied US Lower-48 Net importscoal productiondi
6、splacement,ResCommdemand,Industrialdemand,Powerdemand ex.coaldisplacement,2014 impliedcoaldisplacement,Source: EIA, Barclays ResearchPLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 16,2,Barclays | Gas and Power Kaleidoscope,We expect balances to tightenand prices to a
7、verage $4.10per MMBtu in 2014.Strong industrial demandgrowth and further drop in netimports support prices in 2014,The structural tightening of natural gas balances taking place this year is poised to persist into2014. Yet, the recovery of prices will be only modest, in our view. We expect natural g
8、asmarkets to remain range bound, with prices seeking a delicate balance between coal-to-gasdisplacement needs and drilling economics. We project natural gas prices to average $4.10 perMMBtu in 2014.This years strong industrial demand growth is poised to extend into 2014. Our analysis ofupcoming indu
9、strial capacity expansions suggests that industrial consumption should grow400 mmcf/d in 2014. New fertilizer plants, steel-making facilities, and ethylene/propylene,crackers are among the factors driving this growth (Gas and Power Kaleidoscope: Lets getindustrial, December 18, 2012).Net imports wil
10、l maintain a downward trajectory, in our view. US pipeline gas trade withMexico is undergoing a structural shift: Mexican gas production is dropping, while demand ison an upward slope. The increasing supply/demand gap is met with growing pipeline flowsfrom the US, contrary to earlier plans for incre
11、asing LNG imports. While aggregate pipelinecapacity far exceeds current export levels, regional infrastructure constraints exist. Severalpipeline projects will open up new markets for US gas across the southern border in the 2013-14 timeframe (see figure 1).Imports from Canada should decline further
12、 in 2014, albeit at a slower pace than in 2013.Canadian production has dropped in five of the past six years. Growth of production in BritishColumbia offset Alberta production declines in 2011, but deterioration of drilling economicshalted this trend in 2012. With Alberta and British Columbia produc
13、tion now both in decline,Canadian output is unlikely to turn higher in the near term. Drilling economics should improvein 2014 on the back of projected higher gas prices, but only marginally. Consequently, weanticipate a marginal rebound in drilling: one that will not be sufficient to arrest product
14、iondeclines, but together with a shrinking decline base, will cause declines to moderate. Canadiandemand, on the other hand, is strengthening, with a number of new fertilizer facilitiesexpected to come online in 2014 (North America Fertilizers & Agriculture: Chasing (Crop)Yields, August 15, 2012). W
15、e expect imports from Canada to drop 200 MMcf/d and average5.0 Bcf/d in 2014.The three factors discussed above should reduce the need for coal-to-gas displacement by850 MMcf/d in 2014 from 2013 levels a dynamic that, by our estimates, would send pricesinto the $4.00 - 4.50 per MMbtu range if all els
16、e were to remain equal. This scenario wouldFIGURE 1US/Mexico border planned pipeline capacity expansions,pipeline nameSasabe Pipeline expansion (1)Sasabe Pipeline expansion (2)Willcox Lateral expansionBorder expansions inSoutheastern Texas for LosRamones project,US companyEl PasoEl PasoEl PasoKinder
17、Morgan,Tennessee Gasand Spectra,capacity2005702381,200,estimated in service date20142014-201620132015,notesfrom South Main line system to Sasabe, AZpossible further expansion from South Mainline system to Sasabe, AZ185 MMcf/d of firm capacity already heldby Mexican shippers serving industrial andpow
18、er demand in Sonora, Mexicocapacity expansion of four southeast Texaspipelines that will feed the 2.1 Bcf/d LosRamones project,Source: Company reports, Barclays Research22 January 2013,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012,2013E,2014E,1,0,3,Barclays | Gas and Power Kaleidoscopecause
19、 a step-up in drilling. To be sure, even the higher end of this range would not besufficient to lure a large number of rigs away from oil targets into dry gas ones. However, atprices above $4.00 per MMBtu, the Marcellus, the Eagle Ford, and a number of liquids-richplays are all likely to see increas
20、ed drilling activity. At prices at the higher end of this range,even the Haynesville is likely to pick up a few rigs.,The modest recovery of pricesshould lead to an uptick indrilling, which arrestsproduction declines and putslower-48 dry gas output on amodest upward trajectory y/y,In 2013, given our
21、 price forecast of $3.70 per MMBtu, we expect gas-directed drilling toremain range-bound and hover near the 450 mark. Our 2013 forecast calls for prices tostrengthen in the second half of the year (as production tips into declines) and average $4 perMMBtu in Q4 13. We believe this is likely to bring
22、 incremental rigs to operation in the followingyear. While we do not anticipate a significant pick-up in drilling in 2014 (in a $4 priceenvironment), an uptick to 500 rigs on average for the year, combined with slower (second-year) declines, would be sufficient to arrest the drop in production that
23、we project for H2 13,and bring 2014 output to a modest growth y/y. Thus, our models suggest that drilling activityneeds to remain muted in order for balances to tighten, and for production growth to meetonly a portion of the increased demand and reduced imports. Consequently, prices will have tokeep
24、 to the lower end of the $4.00 - 4.50 range in order to pace the trajectory of production.To be sure, forecasts for the trajectory of drilling and production carry the greatestuncertainties for our 2013 balances. This is even more pronounced for 2014. An increasingamount of gas production will come
25、either from oil wells or from those with NGL-driveneconomics. The amount of gas production coming from wells that are targeting purely gasprice-driven returns is difficult to estimate, but is likely declining sharply. Wells that targetNGL-driven economics can be classified as oil in some cases and g
26、as in others. The same istrue for rigs targeting liquids-rich gas. In fact, some argue that the majority of the drop in gas-directed drilling is simply a result of rigs that target wet gas being increasingly classified as oil-directed. While the question of whether a greater number of liquids-rich w
27、ells (and the rigsthat target those) are masquerading as oil or gas ones will remain a subject of debate, it is nowcertain that oil prices matter for gas-drilling economics and production trends nearly as mucha gas prices do.In the last Kaleidoscope (Gas and Power Kaleidoscope: Hide and seek, Januar
28、y 8, 2013) weanalysed lower-48 production trends by parsing out production from the Marcellus,Fayetteville, North Dakota, and associated gas from Texas. We found that all other areas in thelower-48 were already in a steep decline last year, in line with the trajectory of gas-directed,FIGURE 2US Lowe
29、r-48 dry gas production, y/y change,FIGURE 3Coal-to-gas displacement,MMcf/d5,0004,0003,000,109876,Bcf/d,2,0001,0000-1,000-2,000-3,000,5432,Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec,Source: EIA, Barclays Research22 January 2013,20112013ESource: Barclays Research,20122014E,2012E,in 2015,4,Barcla
30、ys | Gas and Power Kaleidoscopedrilling. We believe these declines are poised to accelerate in 2013 for three reasons: first, datawe analysed through September 2012 had not yet fully reflected the drop of gas-directeddrilling we saw last year; second, some areas are only now tipping into declines; a
31、nd third, weexpect drilling activity to be lower in 2013 than in 2012.The three areas that we expect to drive output higher in 2013 will continue to do so in 2014.Production growth in the Marcellus should remain robust as prices strengthen, and pipelineand processing capacity growth will support hig
32、her gas volumes. Gas from the Bakken inNorth Dakota and associated gas from the Eagle Ford should follow oil output higher as well.Outside of these areas, declines are likely to moderate. First, 2014 production will be decliningfrom a smaller base than in 2013. Production decline rates also moderate
33、 with time, especiallyfrom the first to the second year. Second, we expect gas-directed drilling to rebound modestly,to about 500 rigs. Last, although not least, the efficiency of drilling operations continues torise. Producers have consistently reduced the number of days needed to drill and complet
34、e awell in the past five years. Meanwhile, optimization of the fracking and completion processesis resulting in greater initial production rates. Shorter drilling times and greater EURs (expectedultimate recovery rates) mean that with each year the number of rigs needed to keepproduction flat drops.
35、 There are no indications that the industry will run out of ingenuity nextyear, and we expect drilling efficiency to grow once again in 2014. In aggregate, we expectlower-48 dry gas production to grow slightly in 2014 and average 65.26 Bcf/d, up 310MMcf/d y/y.,Coal-to-gas displacementremains a promi
36、nent feature ofthe market in 2014Balances should tighten furtherWe recommend entering awidening spread trade, sellingcalendar 2014 and buyingcalendar 201522 January 2013,Growing consumption, declining imports, and only modest growth in production allow forcoal-to-gas displacement to moderate in 2014
37、, but not be eliminated. In other words, coal-to-gas displacement will remain a prominent feature in 2014, and coal plant dispatch prices willplay a key part in balancing the gas market. We expect displacement to average 2.3 Bcf/d in2014, down from 3 Bcf/d this year. Thus prices can recover, but onl
38、y marginally as theysearch for a balance between the need for coal-to-gas displacement and drilling economics.Environmental regulations are expected to result in the retirement of a significant number ofcoal-fired power plants. While some of the retirements have already taken place and othersare set
39、 to cease operations in 2013 and 2014, the greatest effect would occur in 2015 andbeyond. A more detailed analysis of coal-fired power plant retirements will follow in asubsequent Kaleidoscope, but we note that this dynamic will support gas demand for powergeneration marginally in 2014, and much mor
40、e significantly in the 2015 timeframe.In fact, 2015 is set to see the unravelling of several dynamics that will cause balances totighten further. First, industrial consumption growth is poised to accelerate, as we discussed inGas and Power Kaleidoscope: Lets get industrial, December 18, 2012. Second
41、, in the latter partof the year, the lower-48 states are set to see the commencement of LNG exports. Third,exports to Mexico should continue to grow, enabled by further pipeline capacity expansions.Add to that a large number of retired coal-fired power plants, and balances are firmly on atightening
42、course. Yet, with coal-to-gas displacement estimated at a hefty 2.3 Bcf/d in 2014,balances are unlikely to tighten sufficiently to take gas out of the coal stack altogether. Thismeans that once again, natural gas prices will be bound by coal displacement and drillingeconomics in 2015, albeit at high
43、er levels than our 2014 price forecast.We believe that at current levels the spread between the calendar 2014 and 2015 price stripsdoes not fully reflect the tightening of balances in the two years, and recommend entering awidening spread trade, selling calendar 2014 and buying calendar 2015 strips.
44、,rebound,bound,5,Barclays | Gas and Power KaleidoscopeCOMMENTARY ON WEEKLY DATAPrices,Weather-induced priceA stronger-than-expectedstorage draw widened theinventory deficit to last yearFreeze-offs continue to curtailsupply, but flows should beresuming as winter weathermoderatesGas-directed drilling
45、is range-,Natural gas prices gained some strength as weather forecasts turned colder for larger gas-consuming areas of the country and inventories saw a larger-than-expected drop last week.The prompt month rose 6.9% on the week to close at $3.57 per MMBtu on 18 January 2013.Calendar 2014 gained 3.2%
46、 to $4.13 per MMBtu in the same time frame. The rally has takenthe prompt month a notable 14% higher than this months lowest close of $3.11 perMMBtu.The temperature-driven swings of prices underscore the vulnerability of balances to winterweather trends. Temperatures are expected to average below no
47、rmal from the Midwest tothe Northeast in the next 10 days. From the start of the winter season, temperatures haveaveraged 4% warmer than normal, pushing prices down to an average of $3.51 from thestart of November to date.Storage levelsInventories dropped by 148 Bcf for the week ending January 11, e
48、xceeding marketexpectations for a withdrawal of 139 Bcf. The East withdrew 86 Bcf, the Producing regiondrew 39 Bcf, and in the West inventory levels declined by 23 Bcf.Storage levels stand 147 Bcf lower than last year at this time, but are still 316 Bcf higher thanthe five-year average. With weather
49、 expected to be colder than normal in key consumingparts of the country in the near term, the deficit to last years levels should widen.Still, storage is heading for at least a 2 Tcf end of March, as estimates for the trajectory ofinventory levels dance along with weather patterns, swinging prices a
50、nd coal-to-gasdisplacement trends.Supply and demand trendsWhile weather trends have the heaviest hand in guiding natural gas prices during the winterseason, we are watching production and drilling trends for signs of changes in theirtrajectory. In the short term, well freeze-offs continue to curtail supply, but with the coldweather shifting from the Western to the Eastern parts of the country, flows should beresuming.Drilling activity remains range bound, with the Baker Hughes rig count at 429 rigs as of,
