Wood Mackenzie anticipates moderate recovery over the 2010 to 2015 period.

Energy research and consultancy Wood Mackenzie predicted a rough period for North America’s gas and power markets throughout the next several years. According to William Durbin, Head of Global Energy Markets/Carbon Research, declining demand and record LNG imports in the years ahead will reverse recent gains in North American natural gas supply.

The press briefing, held in Houston on May 20, 2009, examined the effects of unprecedented demand destruction and deferral (compounded with the economic downturn and record sales decline) on the near and mid-term operating environment for the electric power industry.
George Given, Head of Global Power for Wood Mackenzie said, “The power industry is headed into the ‘Perfect Storm’ low-price operating environment, which will likely get worse before it gets better.”

“The market is experiencing unexpectedly strong, negative load growth and weak recovery, along with very low fuel prices which are compressing margins. Compounding the situation is significant amounts of new capacity – much of which is coal – coming on-line now through 2013 that will sustain the ‘overbuild’ and delay the rebound.” Given said.
Wood Mackenzie anticipates moderate recovery over the 2010 to 2015 period. However, they do not see levels near those of 2007 or 2008 any time soon. With current market parameters and without government endorsement and support, dramatic renewable energy build-out could also be affected in the short term.

“Although carbon regulations and more renewable generation have caught the public’s attention, the reality of realizing these goals seems out of synch with the current market environment and the near-term outlook,” explained Given. “In fact, in many markets but not all, the slower-than-expected recovery could very well impede the implementation of these new regulations, as well as the build out of new power generation capacity, including renewable energy.”

The downturn in the power industry will also initiate a decline in the natural gas market, which is a victim of the same influences as the electricity market.

Jen Snyder, North America Natural Gas Principal Analyst for Wood Mackenzie, pointed out two key challenges facing the natural gas industry short- to mid-term. First, difficult conditions in the power market, including lower generation loads and new coal capacity coming online, are reducing demand for natural gas. Second, the wave of global liquefied natural gas (LNG) capacity and oversupply in Europe and Asia will depress natural gas prices worldwide and subsequently attract additional LNG cargos to the US.

Snyder characterized the natural gas industry is a “victim” of its own dramatic success in developing new supplies. “The industry is now long supply in a weak environment. We expect prices will not rebound until demand picks up, and we don’t see demand starting to pick up until 2012, when the coal build stalls. Also the global market starts to tighten and draws LNG cargos away from the US.”

While many operators attempt to reduce supply by cutting drilling operations, the lower rig utilization also puts downward pressure on costs. “So any price increase or perception of market recovery will be met by highly productive wells,” Snyder added.

An important factor is demand from the power sector, as Snyder explained “Contrary to conventional thinking, even as the economy recovers late in 2010, Wood Mackenzie forecasts that demand for natural gas will lag largely due to the displacement of gas from new coal capacity. It isn’t until the wave of new coal capacity slows around 2012 that we see gas picking up where the additional coal capacity comes off.”