What’s Driving Natural Gas Demand?
Demand for natural gas is on the rise, driven by four major developments in the U.S. and international markets:
- Increasing exports of natural gas to Mexico
- Increasing exports of liquefied natural gas (LNG) to Asia, Europe, Central America and South America
- Increasing demand among domestic industrial users
- The continuing shift from coal to natural gas to generate electricity
Let’s take a deeper look into these four factors and how the shift in demand may affect your business.
Exports of Natural Gas to Mexico
In early 2014, the Mexican people amended their constitution to allow foreign investment in oil and natural gas exploration and production for the first time since the 1930s. This change in the law prompted a boom in U.S. exports of natural gas to Mexico and the construction of pipelines and other necessary infrastructure to deliver that gas.
In 2009, U.S. exports of natural gas to Mexico stood at less than one billion cubic feet (Bcf) per day (roughly 1.4 percent of total U.S. natural gas production at the time). By 2021, forecasters predict exports will be six to eight Bcf per day, somewhere in the neighborhood of 9% of total natural gas production.
That’s a big jump in a very short period of time — the type of shift that can create price volatility.
Exports of Liquefied Natural Gas (LNG) to International Markets
When methane (also known as natural gas) is refrigerated to minus 261 degrees Fahrenheit, it converts to liquid and its volume shrinks to 1/600th of its gaseous state, making it suitable for shipping in insulated vessels.
Until 2016, the United States had never exported LNG out of the lower 48 states.There were simply no LNG export facilities.
Today, there are two facilities in operation (Sabine Pass in the Houston Ship Channel and Cove Point at the Chesapeake Bay), and there are four more facilities coming on line by the end of 2019. In 2019, U.S. LNG export capacity is expected to double from about 5 Bcf per day to nearly 10 Bcf per day, representing nearly 12% of total U.S. domestic production of natural gas.
This is another large spike in demand within a short timeframe, and that kind of change can affect supply and demand, as well as prices.
Rising Industrial Demand
Since 2009, demand for natural gas among U.S. industrial users has surged 33 percent, driven by the refining, petrochemical, special chemical and fertilizer industries. These industries are expected to continue thriving, so it’s likely that this consumption will stay constant, if not increase. The Energy Information Agency forecasts industrial demand to increase an additional 1 Bcf per day in 2019, placing further support under the domestic U.S. natural gas market.
Electric Generation Plugging into Natural Gas
Since 2010, the U.S. has retired more than 250 coal-fired power plants.1 That’s more than the half the country’s total coal-fired power generation. The vast majority of these facilities have been replaced by natural gas-fired electric generating plants.
What has that meant for demand?
In 2010, the United States used approximately 20 Bcf per day of natural gas to make electricity. In 2018, electric power generators used 29 Bcf per day, a 45% increase from 2010, and an amount equal to 35% of all natural gas produced. In the coming years, natural gas will likely continue to gain market share from older coal facilities and from retiring nuclear power plants as well.
What Does This Mean for Your Business?
The “shale revolution,” which began in earnest in 2007, brought about a newfound abundance in natural gas supply in the U.S. market. With so much natural gas available, you might expect prices to go down. And between 2008 and 2018, they did.
Now, things are changing. The shale revolution led to the development of these four major factors that are now driving demand. As a result, natural gas prices are becoming more volatile. In 2018, natural gas hit its low for the year in the first quarter settling in March at $2.64 per MMbtu. By November of 2018, natural gas prices surged to $4.72 per MMbtu, a 79% increase. And when natural gas prices swing, so do electric-power prices.
What does that mean for your business? When you can’t predict fluctuations in natural gas pricing, you’re at the mercy of the market — and that price uncertainty makes it difficult to manage your budget.
If you want to protect your business from price volatility, it may be time to change the way you purchase your natural gas. By diversifying your purchasing strategy and making smaller purchases over time, you can minimize risk and increase your budget certainty.