Today's 3 Biggest Drivers of Natural Gas Demand

Natural gas is projected to be the fastest-growing major fuel over the next two decades, according to research by ExxonMobil . Not only is gas currently much cheaper than oil on an energy-equivalent basis, but it also produces significantly less greenhouse gas emissions -- a crucial advantage as global warming becomes an increasingly serious threat to the environment.

Given natural gas' huge advantages over other fossil fuels, let's take a closer look at the three most important factors that will drive demand for the cleaner-burning fuel over the next several years.

Power generation
The largest single source of natural gas demand over the next few years is expected to come from utilities' power generation needs. According to projections by Enterprise Products Partners, the nation's largest midstream company, power generation will boost natural gas demand by 4 to 7 Bcfd over the next 5-7 years.

Due to the combination of relatively low gas prices and higher coal prices, as well as new environmental regulations seeking to curb U.S. greenhouse gas emissions, approximately one-sixth of existing U.S. coal-fired capacity will be retired by 2020, according to the EIA. Some of the largest utility companies in the nation have already committed to retiring some of their older coal plants.

For instance, the Tennessee Valley Authority earlier this year announced it would reduce coal's share of its electrical generation by about half by shuttering eight coal-fired power plants that have a combined capacity of 3,300 megawatts, while Duke Energy said it will retire five coal-fired power plants in western Indiana by 2018 as part of a settlement reached in August.

LNG exports
The second major demand driver for natural gas over the next several years will come from LNG exports, as more and more countries join the global LNG trade. Fueled by expected economic growth in China, India, and other developing economies, global LNG demand is forecast to more than double by 2025, creating lucrative opportunities for well-positioned energy companies.

To date, the U.S. Department of Energy (DOE) has granted approval to four LNG export projects, including Cheniere Energy's Sabine Pass terminal in Louisiana, the first project to be authorized back in 2011. With more approvals expected over the next few years, LNG exports could add another 4 to 6 Bcfd of natural gas demand over the next 5-7 years, according to Enterprise Products Partners.

Demand from U.S. manufactures
The third major source of natural gas demand will come from U.S. manufacturers, including petrochemical, steel, and other energy-intensive concerns, which use natural gas as both a feedstock and a fuel source. As the price of gas has fallen over the past few years, a handful of U.S. chemical manufacturers have expanded their U.S. operations to take advantage of cheap domestic gas.

For instance, Dow Chemical plans to spend some $4 billion to construct three new petrochemical facilities on the U.S. Gulf Coast, which will be fed by cheap feedstocks produced at an ethylene production plant the company plans to build in Freeport, Texas. Enterprise Products Partners reckons that industrial and petrochemicals operations could boost natural gas demand by 2 to 4 Bcfd over the next 5-7 years.

The bottom line
In addition to these three key drivers, the transportation sector could prove to be another major driver of demand. While natural gas has made significant inroads in the market for long-haul trucking, natural gas passenger vehicles have been slow to catch on due largely to their high costs and the limited number of refueling stations across the country.

But if entrepreneurial companies like Clean Energy Fuels, the biggest provider of natural gas fuel for transportation in North America, can accelerate the shift toward natural gas vehicles, natural gas demand could surge by more than 20 Bcfd over the next five to seven years.

Surging demand for natural gas is being met with rapid growth in US gas production that's revolutionizing the United States' energy position. That's why the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

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Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels, Dominion Resources, and Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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