Natural gas producers predict stronger, but still moderate market for winter

Maureen Lorenzetti
Washington Editor

WASHINGTON, Sept. 19 -- Natural gas producers Thursday predicted that a strengthening economy, increased demand, and declining production will put upward pressure on the gas market this winter.

But according to a new analysis by the Natural Gas Supply Association, the impacts will likely be moderate.

"The good news is that storage is at an all time high, helping to mitigate this year's decreased production numbers and to moderate prices against possible fluctuations in the market," said Bill Transier, chairman of NGSA and executive vice president of Ocean Energy Inc.

NGSA does not forecast prices, although the association noted that the Energy Information Administration predicts a wellhead price this winter of $3.20/Mcf. The US government's weather forecasting agency, the National Oceanic and Atmospheric Administration, said this year's winter could be slightly warmer than normal. But if that is the case, demand may still be higher than last year, in which an unusually mild winter helped drive down demand for winter heating fuels, NGSA noted.

Wildcard factors
Upward price pressures are expected to outweigh downward pressure this winter, but there are always "wildcard" factors that might move the market in either direction, NGSA said. "There is the possibility of a war with Iraq that could increase oil prices and move natural gas prices upward as well," said Transier. "Terrorism in North America could have a similar effect on the economy as Sept. 11, (2001) decreasing demand. Similarly, a double-dip recession could decrease demand," he added.

But the biggest factor that influences prices is still weather, Transier said.

"The strength or weakness of El Nino could be the most influential pressure on natural gas demand, and therefore prices this winter," he said. NGSA noted that assumptions on winter weather are particularly important because last winter was mild (12% warmer than normal) and the differences between a mild and cold winter can shift natural gas demand by 800-1,000 bcf.

Longer-term issues
Longer, term, NGSA said it has become more pessimistic over the past year about its members ability to gain access to supply.

"Today for the first time we are saying there is adequate supply of natural gas, as compared to an ample, abundant supply because we are less optimistic about gaining access to the supplies that this country needs. An ample supply of natural gas does exist if we had access to it," Transier said.

"Our country has a wealth of natural resources, but in as short as a year, we have experienced increased barriers to production, including restrictions on coal bed methane production, legal challenges against using hydraulic fracturing, and expanded moratoria from producing in the eastern Gulf of Mexico," he said.

"Access to supply, and that term encompasses everything from areas that are off limits to drilling to outdated permitting procedures, is more crucial than ever for two fundamental reasons: Demand is increasing, and production is decreasing."

And supplies from Canada aren't a cure all, he cautioned.

"We cannot look to our friends in the North to bail us out any more for extra supply, as they are experiencing many of the same problems we are experiencing: decline rates in old wells and access problems for drilling new ones," the NGSA official said.

A short-term supply barrier, which might impact the market this winter, is pipeline constraints to producing regions, Transier said.

"Although pipeline capacity has increased significantly across the country (new pipelines will add 5.5 bcf/d of capacity this year), there are some producing areas that do not have enough pipeline capacity to bring the available supplies to market."