It appears that next year's prices for natural gas will be flat, according to estimates provided by the Natural Gas Supply Association (NGSA). The estimates were published October 4, 2011, and provided to attendees of the United States Energy Association's (USEA) Annual Energy Supply Forum held in Washington, D.C.
NGSA collected and published third-party estimates for 2012 Henry Hub prices from six separate sources. Energy Ventures Analysis offered the lowest estimate at $3.73 per million British Thermal Units (MMBtu). Raymond James (RJF) estimated $4.25 per MMBtu, the U.S. Energy Information Administration (EIA) forecast $4.33 per MMBtu, Stephen Smith Energy Associates estimates $4.35 per MMBtu and UBS AG (UBS) estimates $4.90. Deutsche Bank AG (DB) offered the highest estimate at $5.00 per MMBtu. The median estimated price is $4.34, and the average estimated price is $4.43 per MMBtu. Current spot and future prices are approximately $3.49 per MMBtu and $3.52 per MMBtu, respectively.
According to NGSA's President and CEO, R. Skip Horvath, the association evaluated the combined impact of the economy, weather, customer demand, drilling activity and storage inventories to conclude a stable outlook. "NGSA expects the economy and the weather, two factors that most influence winter demand, to place subtle downward pressure on natural gas market prices this winter. At the same time, supply and storage data suggest a mix of moderate downward pressure and flat pressure on natural gas prices. This year, we see weather as the most influential factor. Of course, it's also the most difficult to predict."
For long-term weather outlooks, the NGSA relies on the U.S. Department of Commerce's National Oceanic and Atmospheric Administration (NOAA). Last winter was the coldest in a decade, and this winter NOAA anticipates a comparatively warmer season.
Adding to the upward pressure is new demand from the electric power sector. For the first time, Regional Transmission Operators and regulated utilities are dispatching natural gas power plants before coal-fired plants for economic and regulatory reasons. The economics are driven by new heat rates as some combined cycle gas turbines are reaching historic efficiencies.
Both Siemens AG (SI) and General Electric (GE) offer gas turbines that can reach, and have even exceeded, 60% efficiencies. At approximately 700 megawatts, these plants are large and costly. Some new gas turbines produce more power than some nuclear power plants and produce less greenhouse gases per megawatt-hour because they use fuel efficiently.
Older power plants, particularly old coal plants, are relatively inefficient, and many have difficulty reaching 30% efficiency. These older plants tend to create more pollution because they burn more fuel but produce less energy. Older coal plants are being bumped out of the economic dispatch order when newer combined cycle gas turbines enter the market.
It is understandable that utilities would opt to retire these old coal plants rather than update their emission controls. The old units have been fully depreciated and, if updated, they could pose a challenge to profitability. If a utility updates an old coal plant, it would likely make their plants less efficient and less economical.
As a result, NGSA reported that they saw a doubling of fuel switching last winter. According to Horvath, "Not only has coal-to-gas switching continued for an unprecedented three straight years, but published New York Mercantile Exchange (NYMEX) prices suggest that it will continue through 2014."
The fundamentals support additional consumption of natural gas by regulated utilities. American Electric Power (AEP) said that it plans to retire about 6,000 megawatts of coal-fueled power generation. Ameren (AEE) plans to retire 520 megawatts in Illinois. Progress Energy (PGN) announced its plan to shut down 11 coal-burning units representing about 1,500 MW. Also, the Tennessee Valley Authority Commission announced that it would retire 18 of its most expensive coal units. And the list goes on.
This is just the beginning. According to a report published by Sanford C. Bernstein & Co. LLC "...concluded that the United States may be in line to retire 228,000 MW of capacity in the next 10 years." These retirements of aging assets is normal. Nevertheless, a lot of capacity is evaporating, and the only practical replacements are natural gas and importing power from other regions.
While the long-term trend looks strong for natural gas, the short-term utility gains are offset by declines in the other sectors, particularly heating. Overall, prices and volumes appear to be unchanged for the next year or two.