The outlook for natural gas producers is not great. They are getting clobbered by low prices today, amid a glut. But the medium- and long-term looks even worse, with renewable energy increasingly taking market share.

The gas industry has drilled itself into this predicament. Gas production continues to ratchet higher, rapidly replenishing inventories, which had plunged to a 15-year low heading into this past winter season. Inventories are still below the five-year average, but have climbed quickly in recent months.

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If the natural gas industry had hoped that a stunning heat wave sweeping over a large swathe of the East Coast would rescue prices, they are surely now disappointed. Natural gas prices continue to fall, despite the heat, and there is little prospect of a rebound. On Friday, spot natural gas prices fell by another 3 percent, dipping below $2.20/MMBtu.

Record production from the Marcellus is one of the main reasons. But oil drillers are also to blame. The frenzied pace of drilling in the Permian – which, to be sure, has been slowing as of late – has produced a wave of natural gas so large that the industry is flaring enormous volumes of gas because of the lack of pipelines. Texas regulators seem unwilling to regulate the rate of flaring over fear of hurting the industry, so the flaring continues. Related: Is This The Last Bottleneck For Nord Stream 2?

Still, record levels of associated gas production from the Permian are dragging down prices. New midstream capacity later this year from the Gulf Coast Express pipeline will bring more gas to market, adding to supply woes. More pipelines are in the offing for 2020 and 2021.

Even the increasing volumes of gas exported overseas is not enough to tighten up the market. “We expect the current oversupply to persist as production growth, mainly associated gas from oil basins, matches LNG export growth over the next year,” Bank of America Merrill Lynch wrote in a note.

While some of this is not new news, the surprising thing is that the outlook does not seem to improve the further out one looks. There is little reason to expect things to turn around. Gas production is still rising and inventories will be well-stocked next winter. “[T]oo much gas past peak winter keeps pressure on next summer and allows us to maintain our $2.6/MMbtu price projection for the 2020 strip,” Bank of America said. Related: Why Oil Tankers In The Middle East Shouldn’t Hire Mercenaries

Even more shocking still is that the investment bank said that the market becomes more depressed as we move into 2021. “Our lofty 4.5 tcf inventory outlook for 2021 is quite bleak and drives our 2021 average price forecast of $2.4/MMbtu, which is $0.15/MMbtu below the current curve,” the bank said.

Beyond that, the queue of new LNG projects dries up, taking away a growing source of demand. The glut of LNG capacity over the last few years lead to a dearth of FIDs in new export facilities. As the list of projects currently under construction finishes up, there are few projects coming in behind them. “The real problem, in our opinion, is not the LNG export capacity growth over the next year, but is instead the lack of LNG capacity additions in 2021-2023,” Bank of America said. “During the lull in US LNG export growth, the US will likely have to rely on some combination of other sources of demand and a slowdown in production growth.”

But here is where it gets really tricky for the gas industry. Even amid the current down market, demand has also been growing quite a bit. Cheap gas has opened up new markets in petrochemicals, electric power and exports. But by the mid-2020s, renewable energy really starts to begin eating into the gas industry’s market share. To date, natural gas in the electric power sector has grown briskly, seizing market share from the mortally wounded coal industry. But in the 2020s, gas will have a tougher time, as it begins to fall prey to clean energy.

The writing is already on the wall. NextEra Energy Resources signed a deal in recent days that may offer a glimpse into the future. The deal with Oklahoma-based Western Farmers Electric Cooperative calls for a renewables combo – 250 megawatts of wind, 250 MW of solar, and 200 MW of battery storage. Integrated together, the project addresses intermittency concerns. The kicker? It’s cheaper than natural gas. “It’s actually cheaper, economically, than a gas peaker plant of similar size, particularly with the tax credits that are available right now,” Phillip Schaeffer, the principal resource planning engineer at Western Farmers, told Greentech Media. “Prices have fallen significantly over the last several years.”

As the deal shows, this is not an abstract far-off threat for gas. Gas is losing out to renewables today. “[R]enewable energy could provide headwinds for power sector natural gas demand,” Bank of America said. “Wind and solar projects, even without subsidies, are now competitive with new build natural gas generation, which is a depressing statistic for potential longer term natural gas bulls.”

“The lull in LNG demand growth that begins in 2021 and renewable headwinds are too much for the natural gas market to overcome,” Bank of America concluded. Natural gas companies are ultimately going to have to hit the brakes on new drilling, the bank said.

By Nick Cunningham of Oilprice.com

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