Shere thinks the NYMEX gas forward strip could rise as much as $1/MMBtu this year and next, and thinks it could get as high as $6.25/MMBtu by 2012.
"We're increasingly convinced the latest bearish move (back below $3.90/Mcf) has gone way too far," Shere, the senior energy analyst at Tuohy Brothers Investment Research, said in a note.
In the long term, "our thesis has been rather simple--the marginal cost of gas production keeps falling (due to technology and more prolific basins), the marginal cost of coal keeps rising (due to thinning seams and productivity challenges relating to increased safety/environmental oversight)," Shere said.
While in the short-term, low gas prices have utilities buying more gas than coal, generating the 2 to 2 Bcf/d of demand that will balance the market, he said.
Shere noted that Spectra Energy CEO Greg Ebel told a recent Tuohy Brothers conference that gas-fired generation should increase its market share 4% to 5% over the next two years.
"This prediction is presumably based on a combination of coal-to-gas fuel switching, outright coal-fired plant retirements, and increased demand from economic recovery," Shere said.
"Holding gas-fired capacity static (in fact, it's increasing), this higher utilization rate would yield about 20% more gas-fired MWh," Shere said.
"According to the [US] Energy Information Administration, we're consuming close to 7 Tcf of natural gas in the power stack now, so a 20% increase might yield 1.4 Tcf more annual demand (about 3.8 Bcf/d)," he added.
In addition to cheap gas taking market share from coal, gas production offshore in the Gulf of Mexico is declining following the drilling moratorium sparked by BP's Macondo spill, Shere said, and will not regain much ground when that ban is lifted.
"Tuohy Brothers' E&P analyst, Phil Dodge, sees a potentially long-lasting reduction in GOM gas production from a more stringent and slower moving permit approval process," Shere said.
Another subtle change in the supply-demand dynamic is that the move to wetter, liquids-rich drilling is cutting into the amount of dry gas going to the pipe, Shere said.
"'Gas' drilling in liquids rich plays tends to produce a smaller dry gas stream (sometimes much smaller)," he said.
Before joining Tuohy Brothers, Shere was the energy analyst at Calyon Securities and an energy stock analyst at Standard & Poor's. Like Platts, Standard & Poor's is a division of The McGraw-Hill Companies.
China Chemical Weekly: http://news.chemnet.com/en/detail-1411716.html
