Forecast For Compression

Data from the US Energy Information Administration (EIA) show that in 2018, more than 90% of the natural gas consumed in the United States was produced domestically. US natural gas production has increased in the past decade thanks to the continued development of the nation’s shale gas. In fact, shale gas now makes up a higher percentage of total US natural gas production than natural gas produced from both traditional natural gas wells and crude oil wells as associated natural gas, according to the EIA. As US natural gas production has increased, exports of natural gas have increased. In 2018, the United States exported a record of nearly 4 Tcf (1.1 x 1011 m3) of natural gas, either by pipeline to Mexico and Canada or shipped overseas as liquefied natural gas (LNG). EIA data show that natural gas imports were 3 Tcf (8.4 x 1010 m3) last year, the lowest since 2015.

The EIA forecasts that US dry natural gas production will average 91 Bcfd (2.5 x 109 m3/d) in 2019, up 7.6 Bcfd (215 x 106 m3/d) from 2018. The EIA expects monthly average natural gas production to grow in late 2019 and then decline slightly during the first quarter of 2020 as the lagged effect of low prices in the second half of 2019 reduces natural gas–directed drilling. However, the EIA forecasts that growth will resume in the second quarter of 2020, and natural gas production in 2020 will average 92.5 Bcfd (2.6 x 109 m3/d).

While this is good news for those doing business in gas compression, geopolitical factors are beginning to take their toll. Companies are feeling the effects of an ongoing trade war, a volatile US economy, and an increase in overall anxiety.

Cummins has changed its outlook. During the company’s second quarter earnings call, Tom Linebarger, chair and CEO of Cummins, said, “We now anticipate sales in North America will decline by 75%, compared to our 60% down expectation three months ago, with lower demand for new equipment in the US Permian Basin and reduced demand for engine rebuilds.”

The Columbus, Indiana, USA, engine manufacturer isn’t alone.

“The outlook in North America remains difficult to predict. While we expect our production-oriented product lines to grow, we expect overall revenues in North America to be down slightly in the second half,” said Brian Worrell, chief financial officer at Baker Hughes, a GE Company (BHGE). “North America and the US land market specifically are very transactional and remain hard to predict even six to nine months out. We share the view that capital expenditure across North American operators will be down in 2019.”

“In certain regions, producers have slowed development activity, waiting on announced pipeline projects to be built and commissioned,” said Eric Long, president and CEO of USA Compression, during the company’s second quarter earnings call. “General economic uncertainty for the near future has prompted many in our industry to slow down or pause. Our 2019 growth capital expenditure budget is significantly below what we spent in 2018 and we currently expect 2020 to be below 2019.”

Global Opportunity

While the United States shows signs of a slowdown, other parts of the world show signs of continued activity, where future growth in natural gas demand is led by industry and the power sector. Most forecasts show much of the increase in energy demand is concentrated in developing Asia, where rising prosperity and improving living standards support increasing energy consumption.

In its Annual Outlook 2019 report, BP forecasts that China will surpass India by mid-2020 as the world’s largest growth market, accounting for over a quarter of the growth in global energy demand.

In its Gas 2019 Report, the International Energy Agency (IEA) states that gas demand in the next five years is set to be driven by Asia Pacific and is forecast to account for almost 60% of the total consumption increase to 2024. China will be the main driver for gas demand growth, though slower than in the recent past as economic growth slows, but still accounting for about 40% of total gas demand increase to 2024 as the Chinese government continues working to improve air quality and shift its energy system away from coal. Natural gas consumption grew 18% in 2018 in China, but growth is expected to slow to an average annual rate of 8% out to 2024 due to slower economic growth, according to the IEA.

Other Asian nations should also see strong gains in gas consumption over the next half decade, especially countries in South Asia. This includes Bangladesh, India, and Pakistan, where industrial sector growth is expected to drive rising consumption, including fertilizer production to serve growing populations, the IEA said.

In the case of China, coal to gas switching and residential uses play a major role in growing demand, whereas power generation is to be the main driver in the Middle East.

According to the IEA, the industrial sector is expected to account for almost half of the increase in natural gas consumption globally, covering both energy for processes and feedstock for chemicals.

“Internationally, most markets have a positive outlook,” said Lorenzo Simonelli, chair, president, and CEO of BHGE, during the company’s second-quarter earnings call. “This is likely driven by the Middle East, where we have seen continued momentum, and the North Sea, which remains a key area of activity for BHGE. We also see positive signs across other markets, such as SubSaharan Africa, Asia Pacific, and Latin America. As we look at 2020, we do expect to see growth continuing in international markets.”

“As a truly global organization with a favorable mix of geographies and product lines, Enerflex has a positive outlook,” said Marc Rossiter, president and chief executive officer at Enerflex, during the company’s second quarter earnings call. “In the Middle East, we continue to see stable earnings from our rental fleet, which consists of approximately 100,000 hp (74,600 kW) on contract. The company is constantly developing new recurring revenue opportunities in this region. In Latin America, Enerflex remains optimistic as the key driver for growth is a development and build out of natural gas infrastructure in gas-producing markets. Argentina, Brazil, and Colombia represent significant asset ownership growth opportunities. Production of natural gas will grow globally, which should continue to drive demand for Enerflex products and services in the long term.”

Commodity Pricing

In its latest Short-Term Energy Outlook, the EIA lowered its Henry Hub spot price forecast for the second half of 2019 to an average of US$2.36/MMBtu. Its previous Short-Term Energy Outlook expected prices to average US$2.50/MMBtu during this period. The EIA expects natural gas prices in 2020 will increase to an average of US$2.75/ MMBtu. EIA’s natural gas production models indicate that rising prices are required in the coming quarters to bring supply into balance with rising domestic and export demand in 2020. Brent crude oil spot prices are expected to average US$64 per barrel in the second half of 2019 and US$65 per barrel in 2020, according to EIA data.

“Oil prices are currently trading in a range of US$60 to US$70 per barrel, having recovered from around US$50 per barrel at the start of year,” said Bob Dudley, group chief executive at BP, during the company’s second quarter earnings call. “We expect prices to remain volatile as continued supply growth, notably in the US onshore, competes with slowing demand growth, along with ongoing concerns around the possible impact of geopolitical tensions, especially in Iran and Venezuela. In the gas markets, an easing in demand growth, following the exceptional strength seen last year, and continued expansion of LNG supply, has led to significantly lower prices. The Henry Hub gas price remains well below US$3 per million British thermal units, and spot prices in Europe and Asia are about 40% below their levels a year ago. In the absence of extreme weather conditions, LNG is expected to be oversupplied through 2019 and 2020, with gas prices expected to remain under pressure.”

“We expect prices to remain volatile,” added Brian Gilvary, chief financial officer at BP. “Recent geopolitical events, and the potential for worsening global economic conditions, are creating concerns around supply and demand fundamentals, driving volatility in prices. Turning to the US, natural gas prices remained weak during the second quarter, with Henry Hub averaging US$2.60 per million British thermal units compared with US$3.20 in the first quarter. The weakness in price reflects continued strong supply growth, and inventory levels have increased relative to the low levels of the previous two quarters. In Europe and Asia, spot prices have reduced significantly as LNG supply continues to grow with demand easing, particularly in China.”

LNG

The ongoing trade war between the United States and China will impact global LNG trade as China continues to supply its energy needs. The increased tariffs placed on US LNG exports by China could see opportunity shift away from the United States.

This summer, Moody’s Investors Service cautioned, “The tariffs could slow development of incremental LNG export facilities, because any reluctance on the part of Chinese energy companies to contract with US exporters as a result of higher costs will reduce the number of global counterparties seeking additional US capacity.”

Asia remains the dominant market for LNG imports, although the pattern of imports within Asia are forecast to shift, with China, India, and Other Asia overtaking the more established markets of Japan and Korea, and accounting for around half of all LNG imports by 2040, according to BP’s Annual Outlook 2019 report.

“China’s LNG imports continue to grow. South Korea’s continue to grow. India’s continue to grow,” said BHGE’s Simonelli. “It really is, as a fuel source, one of growth as you continue to see the energy transition take place.”

This article is a first-look-feature from the forthcoming September issue of Gas Compression Magazine. Stop by booth F400 at GasTech to pick up your copy .

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