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NGSA Sees Upward Pressure on Winter Prices But No Gas Shortages

The Natural Gas Supply Association's (NGSA) latest winter outlook predicts that there will be no gas "shortages" for firm customers this winter despite supply concerns given the damage from two major hurricanes.

"Although there's been some published concern about a natural gas supply shortage this winter, we simply do not believe that firm-service customers need to be concerned about reliability or deliverability," said NGSA Chairman Joseph A. Blount, president of Unocal Midstream and Trade.

"It could still be some time before we know the full extent of the damage from this year's nasty one-two weather punch, and the weather recovery process from such a devastating and costly storm season will take time."

However, early indications show significant lost winter gas supply. Prior to Rita's arrival, consulting firm Energy and Environmental Analysis Inc. (EEA) told NGSA it was projecting a total of 335 Bcf of deferred gas production by next March from Katrina damage. But now, based on the latest information about Rita, the projection is for about 402 Bcf of deferred Gulf of Mexico gas production (estimates from consulting firm Global Insight and Stephen Smith & Associates run much higher; see related story). That compares to only 174 Bcf last winter from Ivan.

Just based on Katrina's impact, EEA's projections had shut ins of 1 Bcf/d lasting through December, 800 MMcf/d in January and 500 MMcf/d in February. Those projections undoubtedly have increased, but not enough to substantially alter NGSA's winter market forecast, said Blount. Global Insight and Stephen Smith & Associates are predicting 3 Bcf/d will be shut in through the end of the year.

NGSA, which represents major natural gas production companies, expects gas storage levels entering the winter heating season to be close to levels last year, at about 3.2 Tcf, which should be adequate to meet demand. Consumers, nevertheless, should be concerned about winter gas prices. There's likely to be upward pressure on prices this winter, the association said. The winter strip currently is priced at more than $14/MMBtu.

But the cost of the gas already in storage also is substantially higher than what was paid last year. Blount noted that just based on index prices, the cost of the gas that was put into storage for this winter is about $2.35/MMBtu higher than gas stored for last winter.

Much about the winter supply-demand outlook still remains uncertain, Blount noted. The biggest uncertainty, as always, is the weather. Currently the National Oceanic and Atmospheric Administration is projecting a colder-than-normal winter in the East and a warmer-than-normal winter in the West. That could cause more regional disparity in heating bills and energy costs, said Blount.

This winter as a whole is expected to be colder than last winter, which was the eighth warmest on record. NGSA is projecting 3,768 total heating degree days this winter compared to 3,430 last winter.

Meanwhile, the economy has begun to slow. Based on data from Global Insight, NGSA is projecting the nation's gross domestic product will grow 3.4% this year compared with 3.7% growth in 2004, while manufacturing growth will slow to 2.9% from 4.9% growth last year. Overall gas demand is expected to grow 2.3% to 75.8 Bcf/d this winter with residential and commercial demand leading the charge and industrial consumption lower than last winter.

Annual gas-fired generation capacity additions have slowed this year to 11.9 GW compared to 29.5 GW in 2004 and 53.7 GW in 2003. The forecast for next year is 13.3 GW based on projections from Arlington, VA-based consulting firm Energy Ventures Analysis.

On the other side of the equation, NGSA expects domestic gas production this winter to be slightly lower, 49 Bcf/d compared to 49.3 Bcf/d last winter despite a 16% increase in the rig count and 26,100 well completions in 2005 compared to 23,400 in 2004. Blount said despite sharp increases in drilling new gas discoveries are getting smaller at the same time that decline rates at mature producing fields are accelerating. "So we are drilling more wells to produce the same amount of gas, which increases costs."

The hurricanes also have basically wiped out any chance that the nation's producers had of increasing domestic gas production this year. Imports will have to make up for the set back in domestic supply. Canadian imports are projected to grow to 9.8 Bcf/d from 9.1 Bcf/d last winter, while liquefied natural gas imports are projected to increase to 2.2 Bcf/d from 1.7 Bcf/d last winter. The result is expected to be flat supply.

"This winter, demand is expected to increase across all sectors," said Blount. "On the flip side, domestic production is down slightly from last winter, caused largely by a steeper decline rate in maturing fields" and the impact of hurricanes on infrastructure.

Despite the short-term strain on the gas market as a result of the two hurricanes, the nation "should not lose sight of the fact that we are not running out of natural gas. Over the long term there is plenty of cost effective supply in the U.S. assuming we can get access to it," said Blount.

NGSA said in its outlook that "in the wake of what is projected to be the worst storm season to ever ravage the offshore oil and gas industry, the nation will hopefully realize the value of further diversifying our sources of natural gas supply."

"As a nation and industry, we need access to more of the natural gas-rich government lands where drilling is currently highly restricted or off limits," said Blount.

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