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Uncertainty Stalling Northwest NatGas Demand Growth

Industry executives who recently offered Oregon regulators an updated natural gas outlook for the Pacific Northwest said they see faint signs of potential added gas-fired industrial loads taking shape, but flat near-term demand projections nevertheless dominated their forecasts.

Northwest gas distribution utilities told the three-member Oregon Public Utility Commission (PUC) July 18 that supplies and prices look relatively stable for the foreseeable future, but with the caveat that shale gas developments and U.S. exports could impact the mix longer term. For now, the outlook remains one of low prices and adequate supplies with the industrial sector remaining a wild card.

One possible cause for the lack of clarity on the industrial sector is the continued uncertainty in the natural gas markets, Northwest Gas Association Executive Director Dan Kirschner told NGI. "There are just a lot of things that need to be, or will be, settled, and so all we really have out in the marketplace is lots of what I call 'commercial churn." He cited the lack of contracts so far for Oregon's two proposed liquefied natural gas (LNG) export-import terminals: Oregon LNG and Jordan Cove LNG, and their respective connecting pipelines.

In regard to the two LNG projects, he said there is "a lot of posturing by producers" that want a global oil index price while purchasers want a Henry Hub price "and that hasn't broken free yet. He noted that there is at least one export contract tied to Henry Hub prices: Cheniere's Sabine Pass LNG export facility offtake agreements with Korea Gas Corp. "Until that kind of pricing gets widely accepted, we're likely to continue to see this sort of churning in the marketplace, and the LNG exports are just one example."

"In recent weeks prices have softened," according to Kelly Irvine, gas supply director for Spokane, WA-based Avista Utilities. Irvine cited a widening of the basis at Niska Gas Storage Partners LLC's AECO Hub in Alberta, Canada. "They are putting gas into storage pretty heavily, and we're anticipating they will be full of Canadian storage in August, so since we buy a lot of our gas at AECO we are pretty happy to see the softening, and we're hoping the low prices continue into the late summer."

While there are no tangible signs of increased demand for natural gas in the region, developments taking place elsewhere, such as more natural gas use for transportation fuel and shale gas-driven supplies for more electric generation, could influence demand in the Northwest longer term, according to the Northwest utilities.

The project managers for the two proposed Oregon LNG projects told NGI that they are getting robust interest in their plans, particularly from Asian-based companies, and they expect that contracts will fall in place when they have key state-local and federal permits in hand, mostly likely by the end of this year or early in 2014.

"We are continuing on the process of securing terminal capacity holders; none yet have signed up, but there is lots of interest and I would expect to have commitments (not contracts) in hand by late this year," said Jordan Cove LNG project manager Bob Braddock. He noted that the Department of Energy (DOE) export approval for nonfree trade agreement (NFTA) nations is the key. "If DOE keeps sitting on the applications for NFTA exports, that will no doubt delay securing [contract] commitments."

Oregon LNG project manager Peter Hansen told a similar tale, although he needs key state and local permits contracts may be inked. "We're obviously engaged with a wide number of parties overseas that have a strong interest in the project, and we know that the moment we have all our permits, the contracts will follow shortly thereafter." He also noted that Asian-based companies are providing the bulk of the interest because U.S. gas is "some of the cheapest gas anywhere."

Several LNG projects planned for the west coast of British Columbia and the Oregon projects have "a huge advantage" on the magnitude of $3.00/Mcf over Gulf of Mexico export projects when it comes to Far East markets, said Hansen. "We fully expect to get our NFTA export approval from DOE by the end of the year, but it's not a critical path for us at this point."

Kirschner said because North America is now home to a "huge, vast and enormous" resource like natural gas, "people [in the Northwest region] are knocking on our door, and I am hearing more and more stories of industrial users who are interested [in expansions] and in an exploration mode, but no one has signed any contracts yet."

NW Natural's gas supply director Randy Friedman told the Oregon regulators last week that there is a lot of "nibbling" from industry, but there were no bites yet. "It is that kind of time when there is a lot of interest but no 'there-there' yet," Kirschner said. "The [Cheniere model tied to Henry Hub] hasn't taken root yet."

With wholesale gas prices from the region's primary supply sources in western Canada and the U.S. Rockies going lower relative to Henry Hub, and added pipeline capacity now in place with the lateral to Ruby Pipeline, the three utilities emphasized a steady state for both prices and supplies of gas for the near-term future.

"While Nymex future prices are above $4/Mcf, we're looking at prices [from Alberta and the U.S. Rockies] in the $3.70-$3.75 range," said Cascade's Mark Sellers-Vaughn, the utility's gas supply executive. He said his utility is keeping an eye on the impact of future liquefied natural gas imports on prices in the region.

NW Natural supply director Randy Friedman said Rockies prices have remained roughly 50 cents lower than Henry Hub this year, but western Canadian prices at the AECO Hub have dropped "dramatically," to 80 or 90 cents below Henry Hub. Early full storage at AECO was cited as one of the factors.

Ruby has allowed Cascade to diversify its supply portfolio. With the capacity it holds on Ruby, Cascade can move Rockies gas "around" and up from Stanfield, OR, when it encounters constraints on another interstate supplier, Northwest Pipeline. "Ruby actually helps us increase our flexibility and meet future growing demand in Oregon," Sellers-Vaughn said.

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