Lower-than-expected July and August temperatures in many parts of the country have helped slow growth in US demand for natural gas this year. But economic recovery and limited production additions could lift prices late this year and in 2005, particularly if winter temperatures are close to normal, government and industry forecasters say.
"The broad picture is that over the last few years, a lot of factors have increased natural gas demand incrementally," said Dave Costello, the economist who directs compilation of the US Energy Information Administration's monthly Short-Term Energy Outlook.
"The capacity to produce electricity from natural gas has grown significantly. Meanwhile, we could be limited by the amount of new supplies. Year-to-date, we're down on new production, and if we wind up with a positive 2004 number, it won't be very big. We see that the Canadians are going through a similar experience. Other than LNG, supply growth really isn't that good, even as the demand factors expand," Costello said.
Costello was among presenters at a press briefing on the outlook for winter gas supplies sponsored by Washington Gas, the Natural Gas Supply Association, and Washington Area Fuel Fund.
Fuel outlook
In its annual winter-fuel outlook, NGSA said it expects markets to remain tight during the 2004-05 heating season as demand climbs to an average 76.5 bcfd from 73.3 bcfd a year earlier.
"Supply and demand continue to struggle with each other," said Joseph A. Blount, president of Unocal Midstream & Trade and NGSA president, at the press briefing.
Using data compiled by Energy and Environmental Associates of Arlington, Va., NGSA concluded that natural gas price pressure this winter will be similar to the 2003-04 heating season.
EEA expects US gas well completions to increase to 24,400 in 2004 from 20,624 in 2003 and the annual average US gas rig count to climb to 1,024 from 874 year-to-year. However, it says that smaller discoveries and declining production per well will reduce average US wintertime gas production to 49.7 bcfd this winter from 50 bcfd a year earlier.
"The Gulf of Mexico has always been a major contributor to US gas production," Blount said. "But it's a mature area. It's a struggle to keep production there constant. The finds are smaller, and they deplete more quickly. There were bright spots in the northern Rockies and Canada, but keeping production constant is a struggle elsewhere."
Nevertheless, EIA's advance summary of its 2003 annual report of US crude oil, natural gas, and gas liquids reserves, released Sept. 22, said domestic gas production increased slightly (less than 1%) during 2003.
Total US discoveries of dry gas reserves during 2003 reached 19.286 tcf, 8% more than in 2002 and 36% above the prior 10-year average. Most of last year's discoveries were from extensions of existing conventional and unconventional gas fields, it observed.
"EIA's own data, to date, shows 2004 production a little lower through July, although less down than other estimates," said Costello. "Drilling, on the other hand, has been very active," especially in the Rockies.
"Except for Hurricane Ivan's disruption of activity in the Gulf, we would have seen some improvement. Our projection is that US production should be up marginally in 2005," he said.
Imports will increase this winter, according to Energy and Environmental Associates figures in NGSA's forecast. It expects Canada to supply an average 9.9 bcfd, compared with 8.9 bcfd during the 2003-04 heating season. EEA also forecasts a 37.5% increase in LNG imports this winter to 2.2 bcfd from 1.6 bcfd a year earlier.
Demand rising
For demand, NGSA expects continued upward pressure from several economic points. Its forecast is for US gross domestic product, which grew at a rate of 4.7%/year last winter, to rise 3.5%/year this heating season. US unemployment, which averaged 5.8% during the 2003-04 heating season, will drop to 5.4%, while manufacturing, which grew at a 2.5%/year a year ago, will climb to 5.3%/year this winter.
Consumer prices are the single possible restraint on gas demand in NGSA's forecast, which projects 2.9%/year growth in the US Deptartment of Labor's Consumer Price Index this winter, up from 1.8%/year in 2003. But the result, said NGSA, will be a year-to-year climb in natural gas demand this winter to 76.5 bcf/d from 73.3 bcf/d.
EIA expects 2004's average US gas demand to change little from last year's figure, Costello said.
"In the first quarter, we had some weather-related declines year-on-year," he said. "The second quarter was a little different, but in the third quarter, some increases from peak summer demand for electricity for air conditioning didn't materialize because July and August were pretty cool."
Blount suggested that some of this reduced summertime gas demand could be offset by lost Gulf of Mexico production in the wake of hurricanes, however. He said the US Minerals Management Service estimated that as much as 20% of gas produced in the gulf went offline as a result of Hurricane Ivan. "It takes time to check things out from a safety standpoint. Overall, I expect more production to come back online in the next few weeks," he said.
Storage up
Gas storage levels reached an estimated 3.2 tcf at the end of the injection season, compared with 3.155 tcf of inventories a year earlier, according to NGSA. It said 47 bcf of storage capacity was added this year, compared with 17 Bcf during 2003. Local distribution companies paid 12.4% more for gas this past injection season, averaging $5.80/MMbtu.
Costello said the EIA expects US gas demand to grow in 2005.
"The economy is continuing to expand. Although gas prices are pretty high, we have another year of pretty solid growth in the US economy. That incremental supply will be absorbed pretty easily," he said. The likely result will be higher prices, with the Henry Hub spot price average for 2004 reaching close to $6/Mcf, compared with $5.80/Mcf in 2003.
"Price helps balance the US market, and it's in a range that's above our experience before 2000," the federal government analyst observed. "It's in a range where it will stay until the ability to expand productive capacity is bigger than it is at the moment.
"Even with LNG, really significant expansion of our production capability will have to wait for the building of new facilities. Recently, we've had very robust storage builds, slowed up a little by Hurricane Ivan but still well above average. Still, there are plenty of strong demand factors and a limited capability for supplies to grow," Costello said.