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EIA: Onshore Output a Buffer Against Storm-Caused Price Spikes

The continued growth in onshore natural gas production will act as a buffer against any significant price run-ups during the Gulf of Mexico hurricane season, the Energy Information Administration (EIA) said in its Short-Term Energy Outlook for September.

"September has historically been the peak month for hurricane activity, and EIA's current outlook assumptions include shut-in production of 65 Bcf for the remainder of the season attributable to Gulf Coast storms. Nevertheless, continued growth in onshore production is expected to limit any large and sustained increases in the natural gas spot price," said the agency outlook, which was released last Tuesday.

The Henry Hub spot price is projected to average about $9.71/Mcf this year and $8.55/Mcf in 2009, declines of 33 cents and 46 cents, respectively, from EIA's August forecast. The spot price for natural gas averaged $8.49/Mcf in August, $2.96/Mcf below the average spot price in July, according to the EIA.

"Strong year-over-year production growth has been led by the development of onshore fields, particularly in Texas and Wyoming, where production increased by 16% and 12%, respectively, during the first six months of [this year] relative to year-ago levels." Production from the Lower 48 states is expected to reach 50.83 Bcf/d this year compared to 46.40 Bcf/d in 2007, the EIA said. The trend is likely to continue in 2009, with onshore production rising to 52.76 Bcf/d.

The EIA said the hike in Lower 48 natural gas production, excluding the federal Gulf of Mexico (GOM), has more than offset the year-over-year decline of almost 3% during the first half of the year in GOM production. Federal GOM production is expected to be 7.54 Bcf/d this year, slightly less than the 7.59 Bcf/d level in 2007, and rise by 4.3% to 7.86 Bcf/d in 2009.

Overall U.S. marketed natural gas production -- Lower 48, GOM and Alaska sources -- is projected to increase by 2.7% to 59.51 Bcf/d and by 2.2% to 61.78 Bcf/d in 2009, according to the agency.

Looking ahead to the heating season, the EIA sees natural gas consumers paying an average $14.93/Mcf, up 17% from the $12.72/Mcf that they paid last winter. Heating expenditures for the average household heated with natural gas and propane will increase by $162 (19%) and $217 (13%), respectively, while households using heating fuel are likely to face an increase of $585 (30%), it said.

The agency anticipates that gas consumption will grow at a slower pace than production -- by 2.7% to 64.85 Bcf/d this year and by 2.2% to 66.25 Bcf/d in 2009. "Consumption growth is expected in all sectors during the forecast period, led by the residential and commercial sectors [this year] and electric power in 2009. Despite higher prices through the first half of [the current year], natural gas consumption in the industrial sector increased by 3.7% compared with the corresponding period in 2007. Consumption in the industrial sector is expected to increase by 1.6% [18.45 Bcf/d this year] and by 1.4% [to 18.71 Bcf/d] in 2009."

The EIA painted a bleak picture for the U.S. liquefied natural gas (LNG) market. "U.S. imports of [LNG] have been severely hampered by global LNG demand growth and higher relative prices in the Asia-Pacific region and Europe. For 2008, LNG imports are expected to total about 350 Bcf, a decline of more than 50%, or 420 Bcf, from 2007, and then to total about 450 Bcf in 2009 as new global LNG supply is added to the market."

On the inventory side, working natural gas in storage was 2,847 Bcf at the end of August, 102 Bcf above the five-year average and 148 Bcf below the level for the corresponding period last year, according to the agency.

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