Despite Recent Bump, ‘Gas Will Undermine Coal’

NEW YORK—Much was made of how natural gas eclipsed coal as the primary power-generating fuel in the U.S. in the last few years, and again when coal retook primacy more recently.

Politics and economics will continue to complicate that picture, but in the long run midstream operators in North America must be prepared for gas to emerge on top.

“There is clear [government] policy support in the U.S. for coal burning and coal production, but at the end of the day, Henry Hub economics will eventually undermine coal,” said Ira B. Joseph, head of gas and power analytics at S&P Global Platts. He spoke at his company’s annual client conference Oct. 12.

“At the moment the risk to the gas market is to the upside,” Joseph added. “Especially if North America reverts to a ‘normal’ winter versus last year,” which was relatively mild. “Henry Hub prices have fallen short of expectations this year because of the lack of demand over the summer, but a cold winter coming on top of exports of LNG and increased domestic industrial demand would put some strain on the system and tip prices to the upside.”

Further out things get a little more complicated, Joseph said. There are major LNG export terminals due to come into service in both the U.S. and in Australia from 2018 through 2020. Russia has already started pushing more gas into Europe. That competes directly with LNG only in the Atlantic basin, but puts more volumes on the water into the total.

At the same time, a growing market of traders and other non-users, called portfolio players, are entering the global LNG market as volumes increase. As with any commodity market, a bit of arbitrage or speculation helps liquidity and price discovery. Too much can lead to volatility.

Back in North America, Joseph noted the duel between gas and coal and concluded that there is something of a ratchet effect as coal-fired power plants are not just idled but taken out of the fleet.

“Every time gas prices fall back, that is detrimental to coal in the long term,” he said, stressing that the situation at present can only be said about the U.S.

“Major policy decisions by China, India, and others on coal mean that the rest of the world is different,” Joseph said.

One reliable export market for U.S. gas is Mexico, with the notable caveat of pipeline limitations in that country.

“By the time all the pipelines are built to export to gas to Mexico, we are going to have 15 Bcf/d [billion cubic feet per day] of capacity,” said Joseph. “When we talk to the industrial users in Mexico they say that they are going to fill the whole 15. But there are so many constraints on the Mexican midstream once you get past [the major industrial hub of] Monterrey [Nuevo Leon].”

There is “lots of potential upside for gas in Mexico,” he added. “But there are major questions about the role of [national power commission] CFE, and the ability to build out midstream,” both transmission and distribution.