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EIA: 'Modest' Price Boost Next Year

Natural gas prices continued their descent last month, and they could fall below current projections before colder weather swoops in to lend seasonal support, the Energy Information Administration (EIA) observed in its latest Short-Term Energy Outlook, released last Wednesday. Oversupply and a weak economy featured in last month's statistics, with power generation gains on competitive prices a bright spot for the gas industry.

The Henry Hub spot price averaged $3.23/Mcf in August, 25 cents/Mcf below the average spot price in July. "Prices continue to be pushed lower as robust production adds to already high inventories. As electric power demand for air conditioning wanes, a continuation of recent natural gas supply trends could cause spot natural gas prices to fall below current projections before cooler temperatures induce higher demand for space heating," EIA said.

In the agency's projections, prices rise modestly in 2010, reflecting increased economic activity and lower production as a result of the drilling pullback. "However, it will take some time to work off current inventory levels, and enhanced production capabilities should limit significant increases in prices throughout the forecast period," the agency said. "On an annual basis, the projected Henry Hub spot price averages $3.65/Mcf in 2009 and $4.78/Mcf in 2010."

As prices go, so goes consumption -- and vice versa, at least for now. EIA projects that gas consumption will likely decline by 2.4% in 2009 and remain flat in 2010. Despite low relative prices for much of the year, industrial gas consumption declined by 12% in the first six months of 2009 compared with the year-ago period. EIA expects this year-over-year consumption decline to continue through the second half of the year for industrial users, although the trend will be less pronounced. Conversely, EIA expects gas use in the electric power sector to increase by 4.3% on a year-over-year basis during the second half of 2009 as gas continues to compete with coal for a share of baseload power supply at current prices.

EIA expects gas consumption to increase slightly in the commercial and industrial sectors in 2010 as a result of improved economic conditions and low prices. Consumption remains relatively flat in the residential and electric power sectors next year. The anticipated addition of new coal-fired generating capacity and rising natural gas prices limits the potential for significant increases beyond the forecast 2009 level in gas consumption by power generators.

Despite the idling of rigs and the expectation of price- and infrastructure-driven shut-ins, producers haven't staunched the flow of gas into a weak market, at least not yet.U.S. marketed production is expected to increase by 0.9% in 2009 and fall by 3.5% in 2010. Despite a 20% drop in prices and a 45% drop in working gas drilling rigs since the start of the year, production increased slightly from January to June, EIA noted. This reflects improvements in horizontal drilling and robust productivity from shale gas discoveries in Louisiana, Oklahoma, Arkansas and Pennsylvania.

While lower prices have caused a reduction in drilling activity by all rig types, according to data compiled by Smith International, the number of working horizontal rigs has fallen by only 27% since the start of the year compared with a 65% decrease among vertically directed rigs. Working horizontal drilling rigs now represent more than half of the active gas drilling fleet.

As U.S. gas inventories swell to record-high levels, some curtailment of production is expected. The sustained reduction in drilling activity and production curtailments are projected to result in a 5.7% decline in marketed production from the Lower 48 non-Gulf of Mexico (GOM) between the first and second half of the year. The projected 1.3% increase in federal GOM production during the second half of 2009 over the first half results from the addition of producing wells and continued recovery from damage sustained during last year's hurricane season.

Projected U.S. liquefied natural gas (LNG) imports increase to about 460 Bcf in 2009 from 350 Bcf in 2008 and rise to about 660 Bcf in 2010, according to EIA projections. Maintenance to existing LNG supply facilities and delays to new liquefaction projects, in addition to higher world oil prices during the second half of 2009, contributed to the 43 Bcf downward revision in the 2009 LNG import forecast by EIA last month (see NGI, Aug. 17).

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