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FERC Sees Lost Gulf Output Reaching 650 Bcf, Vows to 'Rigorously Review' Market

An estimated 650 Bcf of Gulf natural gas production will have been lost -- or twice the amount of gas lost to date (326 Bcf) since Hurricane Katrina struck in late August -- by the time industry fully recovers in early 2006, FERC staff said in a market assessment of the upcoming heating season that was released last Thursday. That's about 18% of the Gulf's annual gas output. The agency also projected that almost 2 Bcf/d will remain shut in during the November-through-March winter period.

In response to the perilous gas supply situation facing the nation, FERC staff said the agency plans to "rigorously review" both the natural gas and power markets this winter, concentrating on 1) supply and its role as a price driver; 2) energy trading, its price effects, liquidity and any potential for manipulation; 3) the adequacy of infrastructure and its response to stress; and 4) the effects of fuel costs on electricity prices.

Specifically, "we intend to continue our long-standing monitoring of storage levels and information. When observations warrant the effort, we will request transactional level data. Further we will closely follow pipeline utilization and tolerances, relative to regional prices," the agency said.

There was some positive news with respect to gas supply, according to Thomas Pinkston of FERC's Office of Market Oversight and Investigations (OMOI). "Storage inventories have remained adequate despite strong summer demand and supply losses due to the hurricanes," he said. The Energy Information Administration projects that 3.1 Tcf of natural gas will be in storage by Nov. 1, which Pinkston said would be "likely adequate for a normal winter."

In addition, imports of liquefied natural gas (LNG) are projected to rise 600 MMcf/d to 1 Bcf/d over last winter, with the biggest increases expected to come from Trunkline LNG's terminal in Lake Charles, LA. FERC staff noted that the post-hurricane natural gas prices have attracted more LNG cargoes into the United States, but that this may taper off as the winter wears on. There also has been an increase in gas imports from Canada, according to Pinkston. They have been "mildly" up over 2004.

But these increases will by no means compensate for the loss of gas production in the Gulf of Mexico, he said. Including the lost production from Hurricanes Katrina and Rita, FERC anticipates that the drop in domestic production this year will range from 3% to more than 5% over 2004. This doesn't include some of the production interruptions that were occurring late last week in the Gulf as Hurricane Wilma approached U.S. waters. While Wilma was expected to strike Florida, storm-weary energy companies were not taking any chances and began pulling non-essential personnel from platforms and rigs in the Gulf (see related story).

With winter gas prices hovering between $13/Mcf and $14/Mcf, FERC staff said it continued to be most concerned about the regional price impact, particularly in the Northeast and Mid-Atlantic. "Forward markets show potential congestion pricing most significantly into the Northeast this winter, but not really in other regions. Infrastructure has proved adequate but tight in the past, notably in 2003's severe January cold," the agency assessment said. "Since that time, 11 Northeast projects have been completed, adding over 2 Bcf/d equal to almost 20% of load for the region."

Electricity prices "are expected to rise in response to increased fuel prices," FERC staff said. "Forward contracts indicate increases of 95% to 200%. We should point out that forward contract prices aren't exactly comparable to day-ahead prices...Still, forward prices can provide directional guidance."

The biggest hikes in power prices this winter are seen in New York City (138%), which uses gas for 16% of its power generation, and in New England (167%), where one-third of its generation fleet consumes gas. FERC also said it was concerned that the supply-strapped gas market could impair the reliability of the nation's electric system.

"Many gas-fired generators don't have firm [transportation] capacity and may be unable to get gas when it becomes scarce. Pipelines, to maintain pressure, may limit the flexibility, adding to supply difficulties for generators," the agency assessment noted. "Generators burning gas face financial risks if gas is unavailable at the time power is required or is only available at higher 'intraday' prices, and if their gas consumption rates exceed reduced pipeline tolerances."

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