| HOUSTON, June 3
HOUSTON, June 3 There is no question that
landmark U.S. measures to slash carbon emissions from power
plants over the next 15 years will boost demand for natural gas,
an abundant, cleaner-burning alternative to coal.
Yet far from adding a bullish new dimension to the U.S.
natural gas market, the rules the Environmental Protection
Agency (EPA) proposed this week have only added to the gaping
uncertainty traders face in the coming decade, with factors as
such as liquefied natural gas (LNG) exports and increased
industrial usage in flux.
At one extreme, the new rules could boost demand by as much
as 10 billion cubic feet (Bcf) per day by 2020, equivalent to a
14 percent increase from today, according to America's Natural
Gas Alliance (ANGA), a Washington-based trade group.
"Natural gas is going to have to play a big role in the
solution because it is the cheapest way in which to get emission
reductions in the power sector," said Erica Bowman, ANGA's chief
economist. Gas plants emit about half the CO2 emissions of coal
plants, she says.
Barclays, meanwhile, sees only "marginal upside risk" to its
forecast that power demand for natural gas will rise by less
than 2 Bcf per day through 2025. The forecast increase is low
because many coal-fired power plants are already closing due to
previous EPA rules curbing mercury pollution, Barclays says.
The difficulty in predicting how the curbs will affect
natural gas are partly a result of the EPA's pledge to allow
states "flexibility" in how they implement the Clean Power Plan,
which requires the U.S. power sector to reduce carbon dioxide
emissions by 30 percent from 2005 levels by 2030.
Rather than set hard targets for individual plants, the EPA
will give states until the summer of 2016 to come up with plans
to meet their specific goals, with alternatives ranging from
solar arrays, to efficiency schemes, to carbon trading systems
to nuclear power.
Individual states would be eligible for an extension until
June 2017 to come up with their implementation plans, and states
participating in multi-state plans would be eligible for an
extension until June 2018.
The final impact for gas will be heavily dependent on how
states choose to implement the rule, said Prajit Ghosh, a senior
adviser for North America power at consultant Wood Mackenzie.
"Some states might choose to weight their plan toward energy
efficiency savings and less on coal-to-gas switching," said
Ghosh, who sees about 3 Bcf per day demand growth as a likely
outcome of the EPA plan.
Forward gas prices showed little reaction to Monday's
announcement of the plan, given that the mandated reduction in
CO2 was in line with industry expectations. Average natural gas
prices for 2020 were little changed at just below $5
per million British thermal units (mmBtu), versus $4.30 for 2015
An expected implementation timetable of 2017 or beyond means
increased gas use by power generators will coincide with rising
demand for exports through LNG terminals and pipeline exports to
Mexico, along with new demand from chemical and industrial
plants, mostly along the U.S. Gulf Coast.
That confluence of events may intensify the short-term
impact of the rules, with states striving to meet an interim
2020 target of curbing emissions by 25 percent.
The power sector is already halfway toward meeting that
goal: Cheap, plentiful gas supplies and lower power demand have
reduced emissions since 2005, and the industry is "on the
trajectory" to meet the EPA's announced carbon targets, said
Brandon Blossman, managing director of coal and power research
at Tudor, Pickering, Holt & Co, an investment banking firm.
Still, the retirement of existing coal-fired plants will
likely boost gas consumption in the power sector by 5-6 bcf per
day by 2020, lifting benchmark Henry Hub gas prices by 60-70
cents, said Peter Abt, managing director of Black & Veatch's
management consulting division.
"Most of that impact will come sooner, rather than later,"
said Abt. After 2020, Abt said the need for additional gas may
drop significantly, to an additional 0.5 bcf per day. "They just
won't run the coal plants; they'll replace them with gas," he
The task will grow harder if the U.S. economy expands at a
faster clip, potentially reigniting electricity demand.
Creating as much as 10 bcf per day of additional gas
consumption assumes renewed growth in electric power demand,
which has slowed across the nation since 2008, Blossman said.
Just as there is little doubt about increased demand, most
analysts are confident that the nation's vast shale resources
are more than sufficient to meet the need. Whether the necessary
logistics are in place may be a different question.
"It looks like the resource base can handle it," said Jen
Snyder, a principal gas analyst at Wood Mackenzie. "The tricky
part is making sure the pipeline capacity is there to deliver
the gas to markets that need it."
(Reporting by Eileen O'Grady in Houston with additional
reporting by Scott DiSavino in New York; editing by Peter