Higher US natural gas prices positive for production gains in '17, '18: EIA

Washington (Platts)--6 Jun 2017 451 pm EDT/2051 GMT

While projections for higher natural gas prices are expected to reduce gas' share in the generation mix, the subsequent increase in cash flow to gas producers is seen boosting gas production, reversing last year's drop in output, the first annual decline the industry had seen in 11 years, the US Energy Information Administration said Tuesday in its monthly outlook.

The agency, in its June Short-Term Energy Outlook, put second-quarter Henry Hub natural gas spot prices at $3.14/MMBtu, down 2 cents from its May estimate. The Q3 forecast dipped 1 cent from the prior month to $3.20/MMBtu.

The agency put gas prices for full-year 2017 at an average $3.16/MMBtu, a 1-cent drop from the prior month's estimate, and forecast 2018 prices to average $3.41/MMBtu, lowering its estimate from May by 2 cents. By comparison, prices averaged $2.51/MMBtu in 2016.

"The amount of US electricity supplies from natural-gas fired generation is expected to decline this year in response to higher natural gas prices, as generation from coal, hydropower, wind, and solar all increase," EPA acting Administrator Howard Gruenspecht said in a statement Tuesday.

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The agency's outlook forecast power generation from gas to fall to less than 32% of total US utility-scale generation in 2017 and 2018 from an average of 34% in 2016 due to higher gas prices. As gas' share declines, electricity produced by coal-fired units would tick up from 30% of the generation mix in 2016 to 31% in 2017 and 2018, EIA said.

"Wind, solar, and other non-hydro renewables are expected to account for nearly 10% of US electricity generation during 2018, as total generation by these energy resources continues to rise," Gruenspecht said.

Upward pressure on gas prices is generally positive for the coal industry, but EIA's report also pointed to an expectation of considerable gas production gains due to higher gas prices.

Gruenspecht said that after declining during 2016, the first annual decline since 2005, "US natural gas production is forecast to increase in both 2017 and 2018."

EIA expects full-year 2017 US natural gas marketed production to average 78.68 Bcf/d, a 740 MMcf/d downward revision from its prior estimate, reflecting a 1.8% rise over 2016 output levels. Production for full-year 2018 is forecast to average 82.43 Bcf/d, down 660 MMcf/d from the prior estimate, and would be a 4.8% rise over 2017 and a 6.6% rise over 2016.

The agency lowered by 950 MMcf/d to 77.52 Bcf/d its gas marketed production estimate for Q2. The June outlook also lowered its Q3 production forecast by 850 MMcf/d to 79.74 Bcf/d.

The production gains year to year reflect the better financial position gas producers are expected to see from the increased cash flow spurred by higher gas prices, which helped to stabilize and eventually increase spending on new assets.

"Capital expenditures for 22 US natural gas producers increased year over year in the first quarter of 2017 after almost two years of annual declines," EIA said in its report.

"With natural gas prices projected to rise by the fourth quarter of 2017, producers are continuing to add drilling rigs," EIA continued. "For the week ending June 2, natural gas-directed drilling rig count was 100 rigs higher than this time last year. Increases in rig counts and drilling efficiencies are contributing to EIA's forecast of dry natural gas production rising to an average of 76.6 Bcf/d in 2018, up from an expected 73.3 Bcf/d in 2017."

EIA's report noted that projected higher gas prices were a result of "new natural gas export capabilities and growing domestic natural gas consumption."

EIA raised its Q2 natural gas consumption estimate by 290 MMcf/d to 64.09 Bcf/d, while edging up its Q3 estimate by 140 MMcf/d to 66.51 Bcf/d.

Gas demand is expected to slip from 75.12 Bcf/d for full-year 2016 to an average 73.41 Bcf/d in 2017 as consumption by the electric power sector declines, but rebound in 2018 to an average 76.24 Bcf/d, according to EIA's outlook.

Meanwhile, Dominion's Cove Point LNG export facility in Maryland has targeted a late 2017 start, followed by 2018 in-service dates for Sempra's Cameron LNG project in Louisiana and Kinder Morgan's Elba Island facility in Georgia.

Those projects, along with Cheniere's Sabine Pass export terminal in Louisiana which began operating in late 2015 with first exports in February 2016, are projected to boost US LNG exports from 510 MMcf/d in 2016 to 1.89 Bcf/d in 2017 and 2.79 Bcf/d by 2018, EIA said.

When also factoring in gas exports via pipeline, "US natural gas exports are expected to grow at double-digit rates both this year and next year, averaging 10 Bcf/d in 2018," Gruenspecht said.

--Jasmin Melvin,

--Edited by Jason Lindquist,

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