The natural gas production boom out of the Pennsylvania portion of the Marcellus Shale has transformed the market.
In a new note, Morgan Stanley says the Marcellus is about to experience a second wind, with 2014 production increasing by 2.2 billion cubic feet per day to about 70 bcf/d:
“Since 2010, we’ve seen well costs fall between 7.5% and 35%, unit costs are down 13%-38%, and EURs up 25%. Given the historical progress, we would be hesitant to bet against further efficiency gains. While we don’t expect a repeat of the past three years, an incremental 10% improvement doesn’t seem unreasonable.”
However, they also argue demand will remain stagnant:
“The Mercury and Air Toxics Standards [which will cut into coal production to the benefit of natural gas — BI] will not come into effect until Apr. 2015. LNG exports will not materialise until late 2015. Many of the new energy-intensive industrial projects are expected to come online post-2015.”
As a result, they’re revising their price forecasts downward:
“We now expect Henry Hub prices will average $US3.50/mmBtu for 2014 and $US4/mmBtu for 2015. Material demand growth should not materialise before 2017, limiting any large upward move in pricing in the interim. We are also reducing our long-term price forecast to $US4.25/mmBtu, as continued efficiency gains and a likely recovery in NGL prices later in the decade should continue to drive the cost curve lower.”
And all this has negative implications for coal:
“We expect weak gas basis relative to Henry Hub to spread though PA, NJ, WV and even Ohio and Downstate NY in 2014, reducing capacity factors at coal plants in these regions. We see ~8mm tons decrease in [Midwest] coal burn in 2014 relative to 2013.
Here’s their chart showing natgas versus coal: