A.T. Kearney Study Addresses Long-Term Natural Gas Prices

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Global management consulting firm A.T. Kearney has released a report analyzing key actions needed by the natural gas industry to reduce the volatility of gas prices and reach a balanced market that will provide investment incentives for producers, midstream players, marketers and consumers of natural gas products.

The report “With Fortunes to Be Made or Lost, Will Natural Gas Find its Footing?” addresses long-term pricing in the natural gas market and provides insight into five different natural gas 2020 scenarios that could impact the balance of natural gas supply and demand.

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“The North American natural gas market is structurally out of balance and cannot stay this way,” said Herve Wilczynski, A.T. Kearney partner and co-author of the study. “Speculative investment combined with diverging incentives and investment horizons have plagued the industry for years. There is some hope for the future. The increased role of global players and more prevalent use of long-term contracts should bring some stability to pricing.”

Understanding future natural gas pricing is critical for businesses as gas producers and gas users (primarily chemical companies, power generators and gas exporters) must make major infrastructure investments.

“We believe the price of natural gas in the free markets scenario will find equilibrium by 2020 in the $6 to $7 range,” said Patrick Haischer, A.T. Kearney partner and study co-author. “Any lower than that price and production from dry-gas wells would not increase sufficiently to meet demand; any higher and demand from power plants will decline.”

The industry is not structured for short-term win-win scenarios. Understanding what is going to happen requires understanding the players, their economics and incentives. The economic model that is the basis for the report analyzed the key participants in the natural gas supply and demand market and the dysfunction caused by each player too often focusing on only their interests.

For instance, the study shows that independent producers are fond of short-term plays and have an investment time horizon of just a few years. They can bring on capacity quickly and inexpensively, but if gas prices stay below $4 per million Btu, many players with predominantly dry gas portfolios will continue to struggle and possibly go out of business.

“The encouraging news is that some of the natural gas market suppliers are already pairing up,” said Andy Walberer, A.T. Kearney partner and study co-author. “Chemical companies are signing long-term ethane supply agreements with shale NGL producers and midstream companies. LNG companies are doing the same with the suppliers and their customers.”

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