The Potential of Regional Natural Gas Power Plant Build-out to Relieve Appalachian Gas Gluts, Present and Future

The Potential of Regional Natural Gas Power Plant Build-Out to Relieve Appalachian Gas Gluts, Present and Future

This post stems mainly from a recent webinar I attended on the subject, referenced below. The panel discussion included a PJM Power Market executive, Michael E. Bryson, VP of operations, a utilities legal consultant, Richard A. Drom, and a natural gas and energy market analyst, Matthew Hoza of BTU Analytics. The discussion was introduced and moderated by Marcellus correspondent Jamison Cocklin.

The conclusion from the webinar was that while new power plants will certainly help by soaking up some demand, LNG exports abroad and to Mexico will take up most of it. BTU analyst Matt Hoza predicted 5 years of modest gas excess with possible spikes during cold winters. Prices are not expected to match Henry Hub any time soon but should remain on average as they are, reasonably close. Since the U.S. has some of the lowest cost natural gas it is inevitable that LNG exports will continue and expand offering some guarantee of reducing gluts as more facilities come online.

The webinar offered insights from the gas producer perspective, the infrastructure perspective, the utility perspective, and the regulatory/legal perspective. Power plants will be most helpful in the North-Eastern PA area where infrastructure constraints, delays, and permit denials have been higher. The Western Appalachian area has seen some new takeaway capacity and will see more in the near-term and mid-term. Gas power plants built close to shale production areas offer superior economics to any other fuel source, good fuel security and good fuel assurance. Gas on gas competition is also possible as the economics of replacing outdated inefficient gas plants with new efficient combined-cycle plants can also be compelling. Fuel assurance, fuel security, fuel diversity, grid reliability, grid flexibility, and grid resiliency are all issues addressed by power generators. 

A recent PJM study of grid reliability indicates that grid reliability can be assured in the PJM market area (13 states and 21% of U.S. GDP) with 86% gas and likely more. Since current levels in the market area are at 33% gas generation these leaves plenty of room to economically replace aging coal and gas plants with new efficient ones. The area of growth of gas generation is Appalachia and the Atlantic Seaboard. PJM expects 5-10,000 MW of new gas generation to come on in the next 3 years. Fuel assurance/security may eventually become an issue for gas as reserves wind down but gas is expected to be available at good prices for much or all of the life of these plants. At some point there would likely be higher gas prices as core areas become drilled up but that would also likely activate non-core areas as well as other regional plays, both horizontal and vertical.

As takeaway capacity increases from the Western Appalachian Basin with Rover and other pipelines, growth of about 6 BCF/day is predicted from current production there which is about 13.5 BCF/day. In contrast, the Eastern Appalachian Basin area of Northeastern Pennsylvania currently produces about 9 BCF/day with growth expected to be about 2 BCF/day. This area is more constrained by lack of takeaway capacity. New gas power plants in that region help producers. Cabot selling direct helps them. Dominion’s Cove Point LNG export terminal (export capacity ~750 MMCF/day) will also help stimulate demand there through Transco Zone 5.

Nationally about 14.5 BCF/day of new demand is forecasted. 2.5 BCF/day of that is expected to be from power burn so about 17.2%. LNG exports from Sabine Pass are expected to approach an avg. of about 2 BCF/day later this year. I think 8-10 BCF/day is a reasonable prediction for LNG exports from the U.S. by the next 5 years or so. I don’t think it will get much higher than that as domestic reserves need to be assured. Pipeline exports to Mexico are also expected to add a few BCF/day as new pipes are laid. There is still a chance that Appalachian gas prices will become depressed again – though probably nothing near the lows of the last few years – due to warm winters, cool summers, pipeline delays, and LNG build-out delays.

Drilling productivity from rig efficiencies, better targeting and placement, longer laterals, closer frac stages, more proppant per stage, etc. is expected to gain slightly or modestly. Keeping gas prices reasonably low and keeping them from spiking in winter may actually help gas producers by preventing ‘fuel switching’ from gas burn to coal burn where applicable. Appalachia is also home to coal and coal plants.

Other things noted in the webinar include: the assessment that overall renewables have replaced gas demand by about 4 BCF/day and are not expected to be a barrier to gas build-out. The momentum toward efficiency and decarbonization of the grid is expected to continue. The PJM exec also noted that carbon capture and sequestration (CCS) for coal plants has thus far been an economic failure. Although there have been a few technical successes with CCS it is not expected to make much of a dent in the near future. 

References:

Webinar: Super Power: Will New Gas-Fired Power Plants Solve the Appalachian Shale Gas Glut?
May 4, 2017

Natural Gas Exports Can Solve U.S. Energy Glut – by Shelley Goldberg, in BloombergView, May 5, 2017