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Seeking growth: What will drive US natural gas demand?

Understanding US natural gas consumption

​After a decade of incredible growth, the US natural gas industry is at a crossroads: Consumption is up, while prices are down. Companies are seeing major shifts in supply and demand and thinking about ways to sustain growth.

The downside of growth

​​There's no disputing it: US natural gas production has grown remarkably in recent years, even as Henry Hub natural gas prices dropped to near 20-year lows. These low prices have spurred new demand; however, sustaining that growth will be difficult.

The reversal—from the US expecting to rely increasingly on LNG imports to having abundant natural gas resources—has created challenges for the value chain that must be addressed to sustainably grow both gas production and disposition.

Some challenges come from the interplay of geography and geology. Gas is primarily produced in the Northeast and along the Gulf Coast, whereas demand remains widely distributed.

Future demand growth poses other challenges. With expected low-to-moderate economic growth, slowing population growth, and increases in energy efficiency, domestic energy consumption may expand more slowly over the next ten years than the last—and potentially may even decline.

Looking sector by sector to increase demand

Increasing domestic natural gas consumption depends on the following three sectors:

  1. Power generation: Demand growth from fuel switching is likely to be limited. Power generators have benefited from low-cost gas and some aging coal infrastructure has been retired. With increased renewable competition, flat electricity demand, and potentially rising gas prices, power generation utilities are unlikely to be a large part of future consumption growth.​
  2. Industrial: Industrial demand is projected to increase, but the response may be muted as economic conditions in the United States remain uncertain. Petrochemicals will likely be the most visible source of growth, but there are a number of other gas-intensive industries that could contribute as well.​
  3. Transport: Of all sectors, transport has the most potential for disruptive growth, affecting both the integrated oil and natural gas value chains. Countries around the world, including the United States, are moving toward a less carbon-intensive transport industry, and natural gas could displace diesel and bunker fuel in the long term.​

The role of exports

Due to historically low prices and the conversion of existing liquid natural gas (LNG) import infrastructure, the United States has begun exporting natural gas to global markets as outlined in Deloitte’s four-part LNG series. Export growth could be limited as global natural gas markets are in a state of flux with a glut of capacity that could potentially last until the early 2020s. Based on expected market conditions, Henry Hub natural gas prices will need to remain low to compete with internationally sourced cargos. Outside of the challenges facing LNG, the potential for piped exports to Mexico remains robust.

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Three growth scenarios worth considering

During the past decade, upstream producers have shown incredible resilience by increasing production, cutting costs, and building infrastructure. Today, the growth forecast is unclear.

Three possible scenarios that could affect the natural gas supply chain:

  1. Flat demand growth: Lower GDP growth, declining power-generation consumption, flat industrial demand, and slow export growth.
  2. Moderate demand growth: Low-cost gas displacing some coal, industrial consumption consistent, and exports reaching capacity.
  3. Sustained demand growth: Low domestic natural gas prices and strong global economic growth, leading to a boost in domestic consumption and exports.

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An uncertain, but potentially promising future

Few things are certain about the future of US natural gas supply and demand. However, two things can be said:

  1. The market is likely to grow more slowly in the future than in the recent past.
  2. Even if Henry Hub prices rise, they will remain near decadal lows.

Looking ahead, Deloitte's new report, Seeking growth: What will drive US natural gas demand?, predicts that natural gas faces an uncertain future with significant potential. Continued investment, prudent risk management, and steady demand growth will all be vital to sustaining the natural gas sector.

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