Gas plants lose out to more polluting coal as prices rise, says Bank of America Merrill Lynch report
By Gerard Wynn
US gas prices have risen to a level which is driving a “significant” return to burning coal, Bank of America Merrill Lynch (BofAML) Global Research said in a market report published on Tuesday.
The investment bank forecast that US gas consumption in power generation would fall this year, following a fall last year after four straight successive rises from 2008 to 2012.
And it projected strong gas prices through 2017 and beyond on the back of compelling demand and supply drivers.
The price of natural gas has implications both for US energy costs and carbon dioxide emissions.
US carbon emissions fell faster than in any developed country in 2012, because low gas prices following the shale gas revolution had motivated a switch to gas away from higher carbon-emitting coal.
The Department of Energy statistics arm, the Energy Information Administration, said last week that the relative economics of coal, gas and nuclear power would determine the trajectory of US carbon emissions over the next three decades.
Near-term gas supply contracts were now priced at levels which made significant numbers of coal-fired power plants more economic than gas plants, BofAML said on Tuesday.
“Prices have risen to the $4.70-5.00 level where gas to coal switching is very significant,” the bank said in its report, The long and the short of US natural gas.
“While near-dated contracts in 2014 have surged, calendar 2015 and 2016 prices have only moved up modestly. As a result, prices are now encouraging coal burn near-term, but are not yet incentivizing a big ramp up in drilling activity across the country.”
But the bank saw strong supply and demand drivers for higher prices in the longer term, too.
Demand for US natural gas would rise as the country built out liquefied natural gas (LNG) export terminals, and in the wake of expected coal-fired power plant retirements.
“Demand for natural gas in the US is poised to increase very meaningfully in the coming years. It is also important to note that much of this new demand coming online over the next 5 years will likely not be highly price sensitive.”
Regarding supply, the bank found that US shale gas productivity was no longer rising at previous meteoric rates, even as output continued to rise on the back of crude oil plays.
“Even if it increases further, it will likely fall far short of meeting the large pent up incremental demand over the next 5 years. To encourage producers to move back into high cost gas plays, we see long-dated (Cal17 and beyond) US nat gas rising to $5.50/MMBtu.”
US monthly gas prices reached recent historic lows below $2/ MMBtu in April 2012, according to Henry Hub benchmark data.
But they have risen strongly over the past year, and especially during the recent cold winter, reaching $6 in February, a level last seen six years ago.
BofAML expected prices sustained above $4 through this year and next.
“Unprecedented cold weather is leaving a big mark on the US nat gas market.
“In the very short run the only way to balance a tightening natural gas market is to force demand rationing through higher prices. We see prices staying solidly high this year to reduce gas consumption in power generation, with prices averaging $4.40/MMBtu in 2014.
“We expect the strength to continue into next year where we also see prices averaging $4.40/MMBtu.”