Shale boom will slash coal's market share: Moody's

By Bill Holland

May 14, 2013 - Refiners, chemical manufacturers and utilities are the most immediate winners in the US shale gas revolution, Moody's Investors Service said Monday.

The biggest loser? Coal, Moody's said in a research note.

Low natural gas prices created by the shale boom, along with stricter environmental regulations, represent a blow to the fortunes of coal producers, the firm said.

Moody's predicted that over the next 10 years, coal's market share of US power production will fall from nearly one-half of all electricity to one-third.

The primary victim of the shale squeeze will be older, less-efficient coal plants, while larger efficient baseload plants will survive because switching to gas requires too much money, the report said.

"Most of the power producers' fuel-switching has already taken place," Moody's said, "and further substitution cannot happen without considerable capital investment."

Refiners and chemical producers now have a long-term competitive advantage over their international rivals because of low gas prices in the US compared with overseas, Moody's said.

"Among the many refiners set to benefit are Phillips 66, Marathon Petroleum and Valero. With lower natural gas costs, they should enjoy strong cash flows in the intermediate term from North American crude oil selling below international benchmark prices," the report said.

"Companies that produce ammonia and methanol, including CF Industries, Agrium, Methanex and Rentech Nitrogen Partners, will enjoy lower natural gas input costs," Moody's added.

But automobile makers have seen limited effects from the low prices created by shale gas production, and that will continue into the foreseeable future, Moody's said, as consumers have yet to dramatically increase their demand for natural gas vehicles.

Local utilities benefit as gas bills shrink

Meanwhile, local utilities are benefiting from better relationships with their customers and regulators as gas bills shrink and gas-fired electricity competes with coal, the report said.

"The shale revolution in North America benefits the credit profiles of regulated electric and gas utilities in the US, giving these major fuel customers a prolonged period of low natural gas prices," Moody's said.

"These lower prices reduce the cost of the utilities’ fuel and purchased power, which represent their single largest expense.

"Since utilities typically pass fuel costs directly to their ratepayers, low natural gas prices reduce customer bills significantly, improving the cooperative atmosphere between the electric and gas utilities and their regulators in recent years," Moody's said.

One sector that is feeling the bite of low gas prices is merchant power.

"Because gas-fired power plants often serve as the marginal plant during times of peak power demand, lower natural gas prices effectively drive down wholesale power prices for all generators," Moody's said.

The one exception has been large merchant generation company Calpine, whose fleet of plants is largely fueled by gas.

"The impact on their gross margins has been relatively mild because their own fuel costs have dropped with the price of natural gas, and because their higher volumes have at least partly offset their lower margins," Moody's said.

But new builds in the power sector will be determined by the low cost of gas as it guts other fuels on cost.

"In the long run, low natural gas prices will undermine the new-entrant economics of nuclear, coal and renewable generation, and will provide more development opportunities for gas-fired generators such as Calpine," Moody's said.

http://www.platts.com/newsfeature/2013/electricpower/USpower/index