Coal-to-gas switching in the power sector has been a “brutally efficient” driver of US natural gas demand, and until new demand sources materialize, it will keep gas trading in the $3.20-$4.20 per million Btu range, according to Macquarie Global Oil & Natural Gas Economist Vikas Dwivedi.

“Gas demand so far has been led by power,” Dwivedi said during a webinar on North American gas on August 27. “We’re still seeing very good power demand growth, both structural – from real growth – and also from coal-to-gas switching, which is transient.”

Macquarie has estimated that roughly 5 billion cubic feet per day of the US’ 70 bcf/d gas market comes from coal-to-gas switching. And switching is “very sensitive to price…every time we’ve had a good rally, we lose a lot of that 5 bcf/d”, Dwivedi said.

“Coal-to-gas switching [is a] brutally efficient demand response,” Dwivedi said. When natural gas prices rise, switching reverses, and “your rally fizzles out”.

Dwivedi pointed out that coal-to-gas switching – which picks up when natural gas prices are low, and slows down when natural gas prices rise – has effectively set a floor below which gas prices are unlikely to fall, and a ceiling above which they are unlikely to rise, absent other drivers. “Coal to gas switching parity levels have turned out very consistent inflection points for gas pricing ,” he said.

“We’re stuck. We’re in a range-bound market that’s going to be bracketed by $3.20 and $4.20 [per MMBtu],” Dwivedi said. “The only thing that will move markets beyond those levels is a sustained weather event – something brutally hot or cold, or unusual mildness.”

Looking to 2015

But the emergence of new demand sources could shift, or remove, the floor and cap on US natural gas prices. Macquarie anticipates that change will come in late 2015.

“By then we think you’ll have had other types of demand growth become large enough to not require coal-to-gas switching in the sizable way it’s required today,” Dwivedi said. “That way you don’t have key demand items that vanish every time you rally.”

Macquarie sees new demand arising from the following:

• New Gas-Fired Plants: Macquarie expects 4 bcf/d of new gas-fired capacity to come onstream by 2018, of a total of 15.5 bcf/d of capacity proposed.
• LNG Exports: Macquarie expects about 6 bcfd of export capacity to start up by 2020 of nearly 35 bcf/d proposed, “though our lean now is towards a higher number – 8, maybe even 10 [bcf/d] by 2020”, Dwivedi said.
• Pipeline Exports to Mexico: Pipeline projects to Mexico with combined capacity of more than 3.5  are in the works or under consideration. Roughly 17 kWh of new gas-fired generation capacity is on the table for construction and start-up in Mexico over the next several years, so “they will need every bit of it”, Dwivedi said.
• Gas-to-Liquids: More than 2 bcf/d of GTL capacity has been proposed in the US. “I would always say don’t spend too much time on GTL projects, because they usually don’t go anywhere, but these have some real potential to be built in the Gulf Coast”, Dwivedi said. He added that GTL is generally feasible at an oil-gas price ratio of 15 to 1 or better.
• Ammonia and Methanol: These will add about 1-1.5 bcf/d Dwivedi.
• Petrochemicals: Adding petrochemical capacity, at least in terms of natural gas demand, is “not as big as the attention it gets”, Dwivdei said. At about 0.12 bcf/d per world-scale facility, five of those would add a little more than 0.5 bcf/d of demand.

“When we add all these up we get to 18 b’s [bcf] a day by 2020, and a lot of that’s really by 2017-18,” Dwivedi said.