EIA says drilling will boost gas supply in 2001

Higher US drilling rates have begun to boost natural gas supply, the US Energy Information Administration says in its November short-term energy outlook. The government agency revised its estimates for 2001 production growth to about 350 bcf, up from 240 bcf in previous outlooks. But government forecasters say this winter's gas prices will still be about 90% higher than last winter. The EIA also revised upward its estimate of 1999 US electricity output by 1%, resulting in a 3% growth rate.


Higher US drilling rates have begun to boost natural gas supply, the US Energy Information Administration says in its November short-term energy outlook. The government agency revised its estimates for 2001 production growth to about 350 bcf, up from 240 bcf in previous outlooks. But it says this winter's gas prices will still be about 90% higher than last winter.

The EIA also revised upward its estimate of 1999 US electricity output by 1%, resulting in a 3% growth rate between 1998 and 1999, rather than the 2% reported previously. The adjustment boosted nonutility output upward by 37 billion kw-hr, a 7.2% increase over EIA's previous estimates. Projections of 2001 total annual electricity demand growth were cut to 0.9% next year, somewhat lower than they were in the October outlook.

The agency is still expecting this winter to be colder than the last two. This winter's heating degree-days (HDD) are projected to be 10% above last winter's HDD, which were well below normal.

This winter, EIA is projecting total electricity sales by electric utilities will be up by 2.9% over last winter under normal weather assumptions, driven by increased demand in the residential and commercial sectors, which are expected to be up by 4.4 and 4.1%, respectively

In the fourth quarter of 2000, previously falling demand for oil-fired generation is expected to turn around relative to gas-fired generation, as the price differential between fuels in the electricity generating sector shifts to favor oil. The favorable oil-to-gas price differential is expected to continue through 2001.

Meanwhile, near-term natural gas prices have fallen from $5/Mcf in the first 3 weeks of October to about $4/Mcf. EIA said it expects spot and futures prices to remain "quite sensitive" to indicators of demand or supply changes, such as weather or storage.

Although high oil prices have contributed to the current strength in gas prices, the predominant reason for these sustained high gas prices was, and still is to some extent, perceptions about the supply situation going into the winter, according to EIA. Storage injections picked up recently due to warm weather in the last half of October. The downward tumble in spot prices over the last few weeks may be evidence of this, it said.

Underground working gas storage levels are currently about 8-9% below year-ago levels. Assuming normal weather for the remainder of the heating season, EIA says wellhead prices this winter should probably stay above $4/Mcf. levels.

November the key?
But November may prove to be the key because it is generally the last month available in the year for injections into storage. Given the low state of natural gas inventories, a cold month would curtail net injections and could send spot prices over $5/Mcf again, EIA forecasters say. With a colder winter in the works, EIA forecasters expect natural gas demand to be up by 5.1% over last winter.

For the power sector as a whole, including utility and industrial, gas demand is expected to be 6.3% above its 1999 level in 2000 and flat or down slightly in 2001. The reduced growth rate next year is largely due to the reversal in relative prices of fuel oil and natural gas which began in June, said EIA. Fuel oil has price advantage because gas prices are projected to fall more slowly than oil prices.

EIA is projecting net imports of natural gas will rise by about 12% in 2001.

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