Low natural gas prices erode Powder River Basin’s long-standing coal price advantage

Thursday, February 02, 2012

At today's Henry Hub spot price of $2.33, approximately 3 Bcf/d of natural gas could hypothetically replace Wyoming’s Powder River Basin (PRB) coal as an alternative generation fuel on a strictly $/MMBtu basis. BENTEK analysis reveals that natural gas becomes competitive with PRB coal for electric power generation when Henry Hub spot prices are below $3.00/MMBtu. At the Henry Hub spot price of $3.00/MMBtu, about 500,000 short tons of U.S. coal per day could hypothetically be replaced by natural gas. Power plants across the U.S. currently burn PRB coal, however low U.S. natural gas prices may erode the price advantage PRB has held for over a decade.

The competitive pressure being exerted on coal by low natural gas prices is unlikely to ease any time soon. BENTEK's The Market Call predicts average natural gas prices through the end of October to remain low enough to maintain competitive pressure on PRB coal for electric power generation, forecasting a summer cash price of $2.52/MMBtu. BENTEK analysis suggests that Central Appalachian-sourced coal will be competitively displaced first due to its relatively higher prices. However, PRB-sourced coal is also experiencing competitive pressure, particularly in the U.S. Southeast where transportation costs from Wyoming are highest.

BENTEK’s U.S. Power Burn Update: Demand increases despite less heating degree days

• U.S. heating degree days for January 2012 totaled 687, down almost 23% or 200 compared with January 2011.

• U.S. power burn demand for January 2012 averaged 20.8 Bcf/d, 16% higher than January 2011 levels.

• Southeast power burn demand averaged 20% more than in January 2011, reaching almost 6.8 Bcf/d last month.

• In January 2012, Northeast power burn demand averaged 4.7 Bcf/d,17% more than in January 2011.

For daily power burn demand for all U.S. regions, including a special insert in today’s report with additional analysis on the competition between coal and natural gas for electric power generation, please review BENTEK's U.S. Power Burn Report.

For a monthly outlook on natural gas prices and demand, BENTEK's The Market Call provides a sector-by-sector analysis of the underlying factors that drive price, including power and industrial demand as well as production.