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EIA Predicts Consumption Decline, Cuts Price Forecast

While earlier this year gas demand was boosted by coal-to-gas switching among power generators, gas consumption will decline by 1.9% this year and is projected to decrease an additional 0.4% next year, according to the Energy Information Administration's (EIA) latest "Short-Term Energy Outlook," which was released last Tuesday.

Accordingly, EIA cut its fourth quarter 2009 Henry Hub spot gas price forecast to $4.04/Mcf from the $4.33 forecast in November's Outlook. For the first quarter EIA cut its forecast to $4.58/Mcf from $4.94, and for the full year 2010 the forecast was cut to $4.62/Mcf from $5.01.

Driving the weak demand is a steep decline in the industrial sector and "smaller but significant declines in the residential and commercial sectors," EIA said. Fuel-switching to gas earlier this year by power generators was not enough to overcome the overall trend.

"Low natural gas prices relative to coal caused substantial switching to natural gas for baseload electric power generation throughout most of 2009," EIA said. "However, in recent weeks, natural-gas-fired generation has been closer to year-ago levels because of the seasonal increase in natural gas prices and the decrease in coal prices driven by historically high coal stocks.

"In addition, warmer-than-normal weather over the eastern United States during November depressed seasonal space heating demand in the residential and commercial sectors. This weaker consumption is evident in natural gas working inventories, which increased by an estimated 9 Bcf during November compared with the previous five-year average decline of about 57 Bcf over the month."

While economic recovery and a return to normal weather are expected to drive consumption increases in the residential, commercial and industrial sectors next year, EIA is still expecting consumption to fall due to higher gas prices and their negative effect on coal-to-gas switching. The projected share of electricity generated by gas falls from 22% in 2009 to 21% next year, EIA said. Coal-fired generators and wind farms are slated to benefit from the shift. EIA said it expects delivered natural gas fuel costs for generators to rise by 10% next year.

The Henry Hub spot price averaged $3.77/Mcf in November, 35 cents/Mcf lower than the average spot price in October. Prices were depressed as warmer-than-normal weather in November reduced seasonal residential and commercial space-heating consumption by about 1.7 Bcf/d, or about 7%, below the projected 22.85 Bcf/d consumption in last month's "Outlook." EIA said it expects prices to increase as space heating demand rises in the coming months.

"However, strong domestic production, a retrenchment of power-sector gas demand and uncertainty about the extent of recovery in the industrial sector should limit sustained upward price movements through the winter and well into next year," EIA said.

EIA said it expects marketed gas production will increase by 3.7% in 2009, followed by a decline of 3.1% in 2010. Minimal hurricane disruptions and significant growth in production from onshore shale basins have contributed to the increase in domestic supply this year, despite a nearly 60% decline in the working gas rig count from September 2008 to July 2009, the agency noted. Although marketed production in the Lower 48 non-federal Gulf of Mexico has declined since peaking in February 2009, the recent dip in September production appears to be the result of shut-ins, maintenance and pipeline constraints as opposed to declining field productivity, EIA said. Production volumes are expected to have recovered in October and November. Shorter completion times and enhanced well productivity in shale basins contributed to sustained higher production levels amidst a dramatically lower rig count in 2009.

U.S. pipeline imports averaged about 9 Bcf/d through the first nine months of 2009, compared with 9.9 Bcf/d during the same period last year, EIA said. Lower drilling activity and natural gas production in Canada have contributed to reduced pipeline imports this year. EIA expects pipeline imports to fall by 12% for the year. The persistence of low rig counts in Canada leads to lower expected Canadian gas production and lower U.S. pipeline imports next year.

Offsetting a portion of the decline in pipeline imports, U.S. liquefied natural gas (LNG) imports increased this year, averaging about 1.3 Bcf/d through September compared with almost 1.0 Bcf/d during the same period last year, according to EIA. Imports rose, albeit from very low levels in 2008, as new liquefaction capacity added to supply while global LNG demand suffered from the recession. EIA expects that U.S. LNG imports will increase to 1.7 Bcf/d in 2010 with the expected completion of additional liquefaction projects.1

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