According to both the EIA and EIA International Energy Outlook. Natural gas production in North America will decline steadily over the next few decades. This is because U.S. shale gas production is well past its peak. While Canadian shale gas potential has not (yet) been fully exploited due to modest exploration success. And insufficient pipeline infrastructure at home and abroad.
Though liquefied natural gas exports are expected to increase substantially by 2040, this doesn’t change the fact that the total supply for North America will continue to shrink over time as the remaining shale gas deposits are depleted. Most noticeably, it is already clear that 2018 will be the first time since at least 1972 (when the EIA started to publish detailed U.S. natural gas production data) that total U.S. natural gas production has declined year-over-year, with a projected decline of 0.9% in 2018 versus 2017 levels.
This is also supported by a recent analysis from Rystad Energy, which predicts that future gas shale production potential will not support the level of investment needed to maintain current shale output even in a case where $4/Mcf prices were prevalent for several years – let alone the $3/Mcf prices currently seen in North America.
Assuming the U.S. remains a net natural gas importer through 2040, even with the steady decline in both production and imports that has been occurring since 2005, what does this mean for future natural gas prices? While long-term price forecasts are always. A difficult subject due to the difficulty in predicting macroeconomic factors, is current futures market prices for NYMEX natural gas (shown above). May offer some insight regarding likely outcomes. NYMEX futures contracts are considered to be a proxy for future spot prices because they reflect expectations of fundamentals on the day of expiry.
Will the decline in US shale gas production change the overall pattern of natural gas production in North America?
No. Declining shale gas production will have no impact on North American natural gas production, which is already declining. The decline in US shale gas production will just exacerbate the trends that have already been underway since 2005. Over that time, total supply has declined by approximately 20% (from a level of approximately 182 Bcf/d to around 160 Bcf/d) and net imports have increased by approximately 10%, reaching roughly 100 Bcf/d.
What are the implications of these futures market scenarios?
If the current futures contracts are an accurate reflection of future spot prices and do not change in response to the recent downturn, then it is likely that the price of natural gas will be considerably higher than today’s levels well into the future.
Assuming a $4/Mcf price in 2040, Rystad estimates that natural gas prices would be around $9.40/Mcf, or about double the current NYMEX price. While actual long-term natural gas prices are hard to predict, these futures market prices are noteworthy considering that gas prices across all U.S. markets have been relatively low since late 2014 (the period when a number of major pipeline projects started to face regulatory delays), and that the U.S. Federal Reserve has been steadily hiking interest rates over the past few years despite weak economic indicators (which many analysts expect will continue as other global economies slow down).
What is the long-term, or expected future price of natural gas?
It is very difficult to predict long-term gas prices, especially over the next 15-20 years. Regional supply and demand fundamentals, coupled with climate policies, could have a major impact on the price. It is possible that the recent natural gas price plunge was due to an oversupplied market that was resetting itself, but we won’t know for certain for several more years.
What are some techniques used to predict long-term gas prices?
Several different techniques can be used to make a case for a particular future price of natural gas. The method used depends on what assumptions you make about supply and demand in your analysis.
Early projections of natural gas prices are based on scenarios involving economic growth (such as those produced by the U.S. Energy Information Administration), energy demand estimates, and assumptions around pricing trends in other mature markets. Limiting your price projections to only consider factors directly related to gas production, such as production costs and year-on-year changes in market supply, is not necessarily a good approach for making long-term forecasts about future prices because it doesn’t take into account the potential impacts of rising or declining gas demand or global competition for supply between international markets.
