DENVER—Despite very low levels of gas-directed drilling in recent years, the U.S. is awash in natural gas. The shale revolution has unlocked resources at a scale that has massively oversupplied traditional markets. Now, U.S. producers must look to new markets to spark demand.

“Export demand growth is essential and will outpace the organic demand growth that we have forecasted in Canada and the U.S.,” said Rick Allen, director, oil and gas consulting services, Platts, speaking at the recent COGA conference in Denver.

Platts forecasts that from 2015 to 2021 the bulk of U.S. natural gas production growth will come from the Northeast in the Marcellus and Utica, with the rest coming from associated gas and some dry gas plays like the Haynesville, Fayetteville, Barnett, Piceance and Green River Basin.

The Northeast continues to be the most prolific gas producer in the U.S., producing more gas today than Texas. But the Northeast is at risk for delays in development of the pipeline infrastructure needed to take that growing gas supply out to market.

However, any risks to Northeast production gains are mitigated by the ability for other gas-producing regions to step in and fill the void if those pipeline delays do come to fruition.

“If the demand is there, and if the Northeast has any delays to infrastructure development, there will be a price signal that will drive further production in competing basins,” said Allen. “One to watch is the Haynesville—it is close to the market and has good rates of return in our forecast—even beginning before 2018—and continuing very strongly into 2021.”

Against that backdrop of robust supply, the domestic demand scene is much less rosy. “Going forward, we don't expect the same jump in power generation gains as we have seen in the recent past, partly because of price and partly because the low-hanging fruit has already been picked,” said Allen.

Residential and commercial use should increase slightly, but in general will be static. Industrial use will grow, but not strongly. “LNG exports and exports to Mexico will be the big demand drivers,” he said.

The LNG View

The U.S. is now connected to global gas markets in a material way. Unfortunately, at this time the global market for LNG is oversupplied, due both to increased liquefaction supply and reduced demand from global consumers. So while LNG exports will be an important outlet for U.S. producers, there is a cap on that potential.

“We expect the oversupply to continue for some time to come, through 2021, as global liquefaction capacity continues to build,” Allen said.

High prices for LNG after March 2011 drove final investment decisions for liquefaction plants around the world, particularly in Australia and the U.S. This has translated to a 45% addition of total capacity in just six or seven years.

“In any market if you add 45% capacity that market would be challenged to fully utilize that capacity. That's true here as well,” Allen said.

It will also take some time for the LNG demand side to catch up to all the new supply. Demand is currently stagnating in both Asia-Pacific and Northwest Europe, the two largest markets for LNG.

The reasons range from slowing economic growth and large LNG inventory builds in China to the restart of nuclear plants in South Korea. There are positive growth signs from the Middle East and from Latin America, but the scale of these gains is not large.

Specifically in the U.S., Platts expects significant liquefaction capacity to come online from the Cove Point, Sabine Pass, Cameron, Freeport and Corpus Christi projects. Its forecast calls for those plants to operate at utilization capacities in the 40% to 60% range on an annual average basis between 2017 and 2020.

“It will take some time for these projects to reach very high levels of liquefaction,” said Allen.

The Mexico Factor

The other big export market that the U.S. can supply is Mexico.

“Mexico has continued to break all-time records in its receipts of imports from U.S. pipeline gas,” said Allen. Dramatic infrastructure buildouts are happening in Mexico, including more than $16 billion in investments in natural gas pipelines alone.

Billions more are flowing to power generation facilities, both conversions from oil to natural gas and the development of new combined-cycle turbine plants. Pipelines add to the mix, from border crossings to the interior of Mexico. Overall, there has been huge demand growth since 2012, particularly in the northern part of the country.

New border-crossing projects are also coming on between now and 2018, from both West Texas and South Texas. “This is a substantial trend, and this has grown consistently faster than our forecast,” Allen said.

Overall, LNG exports from the U.S. could account for 8 billion cubic feet per day (Bcf/d) of gas demand by 2020. Mexico exports could increase from current levels of some 3.5 Bcf/d to 4 Bcf/d to above 9 Bcf/d. Both of these markets offer welcome new demand that U.S. producers are eager to supply.

Peggy Williams can be reached at pwilliams@hartenergy.com.

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