Robert Rapier is a chemical engineer in the energy industry.

Robert has 25 years of

international engineering experience in the chemicals, oil and gas, and renewable energy
industries, and holds several patents related to his work. He has worked in the areas of oil
refining, oil production, synthetic fuels, biomass to energy, and alcohol production, and
currently serves as Director of Engineering for Arizona-based ZHRO Power. He is author of The
Energy Strategist at Investing Daily, and of the book Power Plays: Energy Options in the Age of
Peak Oil. Robert has appeared on 60 Minutes, The History Channel, CNBC, Business News
Network, CBC, and PBS, and his energy-themed articles have appeared in numerous media
outlets, including the Wall Street Journal, Washington Post, Christian Science Monitor, and The
Economist.

The author is a Forbes contributor. The opinions expressed are those of the writer.

It is hard to overstate the impact of the shale gas revolution in the U.S. In 2005, U.S.
natural gas production had dropped below 50 billion cubic feet per day (Bcf/d), and it
was widely believed that the U.S. was set to become a growing importer of liquefied
natural gas (LNG). In fact, a company called Cheniere Energy built a massive complex at
Sabine Pass on the coast of Louisiana to handle what was expected to be a deluge of
LNG imports.

Fast forward a decade, and natural gas production in the U.S. has surged by 50%,
natural gas prices have fallen from $13 per million British thermal unit (MMBtu) to
~$3/MMBtu, and Cheniere Energy is now exporting LNG. (See How Cheniere Energy
Got First In Line To Export America's Natural Gas). In 2009 the U.S. jumped past Russia
to become the world's top natural gas producer:

These developments weren't widely foreseen a decade ago, highlighting the difficulty
of trying to make long-range predictions. Nevertheless, long-range forecasting is
critical for organizations and investors alike. Thus, today I would like to give my
outlook for how I see the U.S. natural gas market developing over the next few years.

As I have indicated in recent articles, the short-term outlook for natural gas is most
heavily influenced by the weather. While recent projections of a very cold winter are
bullish for natural gas prices, the amount of natural gas currently in storage is near a
seasonal record. This makes it even more challenging to forecast prices over the next
few months, but as I recently argued I would be especially cautious with natural gas
prices above $3/MMBtu and with very high inventories. (Natural gas prices have
recently retreated since I first urged caution).

The longer term, however, is a different matter.

I believe that there are a number of drivers on the demand side of natural gas that are
likely to keep upward pressure on prices in the long term. Natural gas producers will
have to aggressively expand production in order to keep up with growing demand.
This, I believe, will create many opportunities for natural gas
producers and infrastructure providers.
I see four large drivers in particular on the demand side. They are the growth of LNG
exports, the US Environmental Protection Agencys (EPA) push to phase out coal, a
renaissance of chemical manufacturing, and the growth of pipeline exports to Mexico.
I will briefly comment on each.

Cheniere Energy may have been the first company to start shipping LNG from
the Lower 48, but the Federal Energy Regulatory Commission (FERC) has so
far approved 10 projects with a total proposed natural gas export capacity of
15 Bcf/d. That is equivalent to just over 20% of 2015's record U.S. natural gas
production. In addition to the projects that have been approved, there are
another 15 that either have pending applications or are in pre-filing with FERC
with a total capacity of just over 25 Bcf/d. Of course not all of these projects will
be completed, but the majority of those that have already been approved will
be.

The Energy Information Administration (EIA) attempted to quantify the impact

of increased exports in a 2012 report. Under the scenarios it modeled, 12 billion
cubic feet per day of natural gas exports would increase domestic natural gas
prices by about $1.60 per MMBtu.

The 2nd major demand driver will result from the retirement of coal-fired
power plants. Nearly 18 gigawatts (GW) of electric generating capacity was
retired in 2015, and more than 80% of that was coal-fired. The EPA's proposed
Clean Power Plan (CPP) will accelerate the phase-out of coal (should it prevail in
court), and as I have argued previously the primary beneficiary will continue to
be natural gas.

In fact, even in the absence of the CPP, the EIA is projecting another 40 GW of
coal-fired power to be retired by 2040. Meanwhile, again in the absence of the
CPP, the EIA is projecting a net addition of 121 GW of natural gas-fired power by
2040. Overall, the EIA projects that natural gas generation will increase by 26%
between last year and 2030 and by 44% by 2040. For reference, last year 35% of
U.S. natural gas consumption was used for electricity generation.

New manufacturing is also expected to be a major demand driver. In 2013 the

American Chemical Society released a report called Shale Gas, Competitiveness,
and New US Chemical Industry Investment: An Analysis Based on Announced
Projects (PDF link here). The report describes the dramatic transformation in the
global natural gas landscape as a result of expanding shale gas production in the
U.S., and what that means for the U.S. chemical manufacturing industry:

Chemical companies from around the world have announced plans for a
significant number of new projects to build and expand their shale-advantaged
capacity in the United States. Through the end of March 2013, nearly 100
chemical industry investments valued at $71.7 billion had been announced. The
majority are being made to expand production capacity for ethylene, ethylene
derivatives (i.e., polyethylene, polyvinyl chloride, etc.), ammonia, methanol,
propylene, and chlorine. Much of the investment is geared toward export
markets, which can help improve the US trade deficit.

The report goes on to estimate that 1.2 million jobs will be created or supported
during the investment phase, and 500,000 during the production phase. Much
of this new chemical capacity will utilize the methane in the natural gas. How
will this new capacity affect demand for natural gas? The University of Texas
Center for Energy Economics has estimated that the new petrochemical projects
will boost industrial demand for natural gas by 19% to 31% by 2020.

Finally, although pipeline exports to Canada rose to nearly 2.7 Bcf/d in 2012,
they declined to 1.9 Bcf/d in 2015. Pipeline exports to Mexico, on the other
hand, have more than made up the difference. In 2010, Mexico imported 0.9
Bcf/d of natural gas from the U.S. By 2015 that had grown to 2.9 Bcf/d, with no
sign of slowing down.

These are four factors that point to strongly growing demand for natural gas in
the years ahead. The EIA is projecting that these demand drivers will impact
prices. By 2020 the EIA thinks natural gas prices will rise more than 50% from
current levels, hitting about $5 per MMBtu.

This seems like a no-brainer given all the demand drivers, but there is one
possible scenario that could keep prices well below $5/MMBtu. Keep in mind
that U.S. demand for natural gas over the past 5 years has already grown by 9
Bcf/d, and despite that earlier this year prices dropped to ~$1.50/MMBtu.
That's because as strong as demand growth has been, production has grown
even faster, which has led to record inventories.

Thus, if gas production continues to expand at the rate of recent years, the price
of natural gas might be kept in check. However, natural gas production has
already flat-lined in response to this year's low prices. If production is unable to
keep up with growing demand, prices will rise and producers will make higher
margins on lower volume. If production merely keeps up with demand, prices
might be held in check but producers will make money as production expands.
The only really negative scenario for natural gas producers is if they expand
production so rapidly that prices again collapse to sub-$2/MMBtu levels.

Presently you can buy a September 2020 contract for natural gas for under
$3/MMBtu. Given the variety of demand drivers and the probability that they
are going to continue to push natural gas demand higher for years, I think
natural gas companies will be a good bet over the long-term. Over the next
three to five years out and beyond, I dont believe sub-$4/MMBtu natural gas
can be sustained, and that will benefit natural gas producers in the years ahead.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Natural Gas Production In Russia And The U.S.