With the exception of 2002, U.S. gas demand has been flat over the last five years because of limited supply growth, but going forward demand growth will be limited not only by supply but also by conservation in the residential and commercial sectors, demand destruction in the industrial sector and fuel switching in the electric sector, all because of high prices, consulting firm Energy Ventures Analysis (EVA) said in its latest Fuelcast outlook.
EVA predicts there will be a 1% decline in gas demand in 2006 followed by a 2% rebound in 2007. "Going forward it is projected that additional conservation on the order of 1% per year will occur within [the commercial and residential] sectors, particularly during the winter months," the Arlington, VA-based consulting firm said in its report. "The primary driver in this additional level of conservation is the 60% increase in gas prices for the...winter versus gas prices during the winter of 2004/2005." EVA expects demand from these two sectors to rise only 0.6% in 2006 and only 0.3% in 2007.
Industrial demand destruction also is projected to continue. While the industrial sector suffered severely from the hurricanes last fall, even before the hurricanes industrial demand destruction was averaging about 1.2 Bcf/d, EVA estimated.
Meanwhile, in the electricity sector, the combination of more moderate weather and heightened fuel switching this summer "likely will result in a decline in electric sector demand, which is identical to what occurred in 2003 following the very warm summer of 2002," the group said. EVA predicts demand from the sector will fall 3% this year. Part of the reason will be related to low generation plant operating capacity factors. EVA expects the average capacity factor of gas-fired power generation won't reach 40% before 2010.
Of course all these demand issues probably will continue to take a back seat to supply concerns. The biggest factor impacting gas supply will remain the recovery from hurricanes Katrina and Rita, as well as the next hurricane season and the fate of LNG imports, all of which will create considerable uncertainty.
The current projection on hurricane recovery shows about 190 Bcf of supply, or an average of about 520 MMcf/d, will remain offline in 2006, EVA said. Because of current predictions for another active hurricane season, EVA has added 32 Bcf of lost supply due into the mix from new hurricanes this year, which is about equivalent to the amount of production lost last year prior to the devastation from Katrina and Rita (i.e., from Arlene, Cindy, Denis and Emily). EVA's base case doesn't assume another major hurricane will impact the critical areas of the Gulf.
EVA expects the other basic production trends to continue, with sharp declines in the Gulf of Mexico partially offset by a few new deepwater projects, the Rockies and Midcontinent growing significantly and the remaining basins relatively flat.
Only modest increases are expected in liquefied natural gas (LNG) imports over the next two years because of the heavy dependence in the U.S. on the LNG spot market, which will be increasingly competitive, EVA said.
"While the expansion of North American regasification capacity over the next two years is significant, it is less than half of the expected capacity additions that will occur in Europe and Asia over the next two years," the report stated. "In fact, over the 2005 to 2007 period, North American regasification capacity additions represent only 28% over the total world increase in regasification capacity." In 2008, however, that percentage will change significantly with about 11.8 Bcf/d expected to be added in the U.S.
Current projections also show that only two new gas liquefaction projects and one debottlenecking project will come online worldwide this year (1.1 Bcf/d), following a very active year in 2005 with seven trains plus one debottlenecking project completed (4.2 Bcf/d). Five of the 2005 projects came on late in the year and will improve the 2006 picture. For 2007, EVA expects liquefaction additions to pick up again, reaching 2005 levels with six countries adding six trains plus one expansion (4.2 Bcf/d).
However, 68% of U.S. LNG imports currently come from the short-term, or spot market, which represents only about 12.5% of the total LNG market (2.5 Bcf/d). "While historically the U.S. has been able to obtain the lion's share of the spot market shipments for LNG, that was not the case in 2005 as first Spain and then Britain became the dominant participants..." EVA noted that in December gas prices hit $26/MMBtu in Britain, causing the country to seek alternative supply for its recently completed Isle of Grain import terminal.
The consulting firm predicts that because of large regasification additions overseas the U.S. will not have an easy time in the future attracting spot LNG the way it did in 2003 and 2004. "Instead, the U.S. performance in the spot LNG market [in 2006] likely will be only slightly better than in 2005." It also predicts that the overall capacity factor at U.S. LNG import terminals "will continue to decline to under 50%.
The total impact on prices this year should lead to very little net change from 2005 levels, EVA said. "However, if either record hot weather occurs or a major storm strikes key areas of the Gulf, gas prices likely will repeat the patterns that occurred in 2005 and move to even higher levels.
"Absent a major storm, gas prices likely will be linked to oil prices for most of the year and as a result there will be continued fuel switching within the power sector."
For more on EVA, go to http://www.evainc.com/.
Intelligence Press Inc. All rights reserved. The preceding news report
may not be republished or redistributed, in whole or in part, in any
form, without prior written consent of Intelligence Press, Inc.