By the OGJ Online Staff
HOUSTON, Mar. 7�US government forecasters expect gas demand to slow this year, but prices are expected to remain strong on weak storage refill numbers.
The US Energy Information Administration (EIA) expects gas in storage to reach 689 bcf by Mar. 31, the end of the heating season, or 100 bcf higher than last month's projections. But such an end-season level would be 38% below the previous 5-year average and the lowest ever recorded by EIA, said Dave Costello, author of the agency's monthly short-term energy forecast.
He said the shortfall will be all but impossible to make up between now and the start of the 2001 heating season. Net injections between April and October would have to be about 500 bcf�or 25% above average�to bring working gas to average preseason levels for next winter, the agency said.
"Consequently we expect the industry to fall well short," Costello said. "Average monthly gas spot prices below $4/Mcf between now and next winter are possible, but do not seem very likely under these circumstances.
"In our view, only a spectacular performance from the US and Canadian gas industry in terms of increased production or an extremely mild summer this year would generate much in the way of additional reductions in natural gas prices beyond what has already happened since midwinter."
With wellhead prices this heating season likely to end up more than double the price of last heating season, EIA said the length of time that gas prices have remained so high is unprecedented. "Moreover, the current dynamics of the natural gas market leads us to believe that prices at the wellhead will not soon be returning to the low $2/Mcf experienced just 1 year ago," Costello said.
By next year, EIA said, the storage situation should improve modestly and with that, a decrease in the average annual wellhead price. The agency predicted production increases and imports needed to keep pace with gas demand will be accompanied, for the time being, by relatively expensive supplies for gas due to rising production costs and pipeline capacity constraints.
With the economy slowing, EIA is expecting US gas demand growth to weaken to 2.3% this year, down from 4.4% in 2000. But growth in 2002 is expected to heat up again to about 4.1% as the economy picks up again and as new gas-fired power generation requirements continue to mount.
In contrast to EIA's predictions, Chris McGill, the American Gas Association�s managing director of policy analysis, said, �At the beginning of the current winter heating season, they said we wouldn�t have enough gas in storage, and it was nonsense. Predictions like this have proven to be untrue year after year.
�The reason is that it doesn�t matter where you start in the spring. The levels will get to where they need to be before winter. The companies will acquire gas as they need it, and they will get storage to well over 90% before the start of winter.�
McGill said EIA�s analysis was based on gas storage levels at the end of the last five winters, which were warmer than usual. As a result, more gas was left in storage at the end of the season than normal. The current winter has been somewhat colder.
And McGill noted that storage, on average, only meets about 20% of winter demand. The rest comes from current production.
Turnaround in 2002
By next year, EIA noted, more than half of the increases in electricity generation are expected to come from gas. Furthermore, gas demand in the industrial sector�the single largest gas-consuming sector�is also expected to make strong gains in 2002.
This winter's natural gas prices at the wellhead will average $5.64/Mcf, EIA said. Wellhead prices are currently projected to decline to an average $4.05/Mcf for spring and summer.
However, the agency warned, if summer weather is hotter than usual in regions dependent on gas-fired electricity, then injections into underground storage for next winter would be strained and prices could start rising more sharply and sooner than expected.
Domestic gas output for 2001-2002 is expected to rise as production responds to the high rates of drilling experienced over the past year, EIA said. Production is estimated to have risen 3.1% in 2000, and it is expected to continue to increase 3.3% in 2001 and 2.5% in 2002. Although gas production and imports are expected to increase in the forecast period, Costello said, gains in supply will not be enough to bring the wellhead price down to $2-3 in the short term.
EIA is projecting net imports of gas to rise by about 15% in 2001 and by another 4% in 2002. This winter's net imports will be 6.6% higher than last winter's, Costello said.
A new report by Canada's National Energy Board predicts gas deliverability from western Canada will rise by 1.1 bcfd by 2002, due to the ongoing drilling boom. Western Canada supplies 15% of the gas consumed in the US.
Electricity fuel switching
EIA projected demand for electricity will rise 2.3% this year and next, compared with 2000's estimated demand, which was 3.6% higher than in 1999. Electricity demand growth is expected to be slower, partly because economic growth is also slowing from its 2000 level.
This winter, total electricity demand is expected to be up by 4.6% over last winter's level, EIA said, driven by increased demand in the residential and commercial sectors, which are expected to be up by 8% and 4%, respectively.
In the fourth quarter of 2000, EIA said, previously falling demand for oil-fired generation began to turn around as the price differential between natural gas and oil in the electricity generating sector shifted to favor oil, prompting those plants which can switch to oil to do so.
This trend is projected to continue through first quarter 2001. Although the favorable price differential for oil relative to gas is expected to continue through the forecast period, by the second half of 2001, EIA said, increases in gas-fired capacity are expected to keep gas demand for power generation growing.
