By OGJ editors
HOUSTON, Dec. 4 -- The outlook for the 2003 North American natural gas market hinges on storage because flat-to-declining supply coupled with power generation demand should tighten the gas market, Houston-based Simmons & Co. International said.
"The US natural gas production treadmill is more visible than ever, and with a lethargic rig count that continues to show no signs of recovery in the near term, we believe that 2003 production will likely decline 1.5%," said David Pursell of Simmons & Co.
"In fact, we forecast a market tight enough that industrial demand will not be able to grow, as the supply of natural gas will simply not be available, and industrial demand is the marginal consumer," he added in a Nov. 8 research note.
"Thus, prices are likely to reach equilibrium at the level required to discourage growth in industrial demand for gas."
Simmons & Co. has increased its 2003 Henry Hub natural gas price forecast to $3.80/Mcf from $3.30/Mcf, reflecting the gas markets improving fundamentals, Pursell said.
Supply
Overall gas supply for the US markets is expected to be flat, he said, forecasting a US production decline of 800 MMcfd. Pursell expects that production decline to be partially offset by increased imports.
"Our model indicates that US production will modestly decline, as 2003 drilling activity will likely be slow to ramp up from relatively subdued 2002 activity levels," Pursell said. He forecasts an average 2003 level of 943 rigs operating, which would be a 14% increase over the 2002 average level of 831 rigs.
Meanwhile, the natural gas import situation has changed during the past few years, he said.
"Canadian production is at a zenith, and imports from Canada could decline next year while US natural gas exports to Mexico are on an increasing trajectory. Thus, the burden to increase US gas supply increasingly rests on the untested shoulders of LNG," Pursell said. He expects increasing Mexican exports will offset increasing LNG imports.
"As such, we are currently modeling 2003 net imports increasing slightly compared to 2002," he said.
Demand
Simmons & Co. expects flat industrial demand for gas with a 0.4 bcfd increase in residential-commercial demand and a 1bcfd increase in power generation demand.
"In total, we estimate that 2003 US natural gas demand will increase by 1 bcfd (or 2.1%) over 2002, driven by continued growth in the electricity sector," Pursell said.
Storage
Assuming an 8% warmer than normal winter, Simmons & Co. sees gas in storage on Mar. 31, 2003, approaching 1,200 bcf compared with 1,518 bcf on Mar. 31 of this year.
"With low levels of storage entering the 2003 refill season, we do not see storage levels exceeding 2,700 bcf entering the 2003-04 winter (compared to approximately 3,200 bcf entering the current winter)," Pursell said.
A key element in Simmons & Co. supply and demand modeling is the recognition that end-of-season storage levels have a tight range between full (3,250 bcf) and minimum full (2,700 bcf).
"Even though theoretical (name plate) working gas in storage is considered to be near 4,000 bcf, operational or practical full levels are near 3,250 bcf. As storage approaches this level, aggregate storage injectivity is diminished and, in some cases, not all the natural gas available for storage can be injected. This results in some forced production curtailments, which occurred towards the end of the injection season in both 1998 and 2001?years when working gas approached/exceeded 3,200 bcf," Pursell said.
Winter heating demand
Local natural gas utilities need to have adequate natural gas storage inventories before demand exceeds supply with the onset of winter heating demand.
"History shows that these utilities are price insensitive buyers of gas in order to ensure they have the ability to meet the potential winter space heating demands of their residential customers," Pursell said.
The 550 bcf difference between full and minimum full storage "highlights the very slim margin between 'too much' and 'not enough.' Moreover, only slight changes in supply and demand can create a market that has 'too much gas' to one that is 'tight,'" Pursell said.
"The 550 bcf difference in storage is equivalent to a change of 1.5 bcfd in supply or demand (or a combination) over a 12-month period. This is precisely the situation we forecast as we look into 2003," he added.
"Storage will end the 2002 injection season at nearly 3.2 tcf. Using what we consider to be a conservative set of assumptions, we must cut industrial demand slightly (1%) in 2003 to ensure storage levels approach 2,700 bcf. . .this situation is driven by a combination of continued growth in gas-fired power generation demand and continued declines in US natural gas production."
