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EIA: Gas Production, Demand Declines to Continue

Natural gas prices, production and demand are expected to continue on a downward spiral through the rest of the year and possibly pick up in 2010 if the economy recovers, the Energy Information Administration (EIA) said in its Short-Term Energy and Summer Fuels Outlook Tuesday.

The Henry Hub gas spot price is projected to decline by more than 50% this year -- to an average of $4.24/Mcf from an average of $9.13/Mcf in 2008 -- before increasing to an average of more than $5.80/Mcf in 2010, said the EIA, the statistical arm of the Department of Energy.

"Lower consumption, brought about by the economic slowdown, and higher production levels [earlier this year] have been the primary contributors to lower natural gas prices. Henry Hub spot prices began April below $4/Mcf and, absent signs of dramatic economic recovery, are expected to remain below $4 until seasonal space heating demand picks up this fall," the agency said.

"Higher prices are expected in 2010 as the economy improves. In addition to demand recovery, the current drilling cutback and limited access to credit for producers could lead to even higher prices if supply fails to keep pace with demand in the short term. On the other hand, a larger-than-expected increase in LNG [liquefied natural gas] import volumes coupled with sustained economic weakness could keep prices depressed. The Henry Hub spot price is expected to average $4.24/Mcf [this year] and $5.83/Mcf in 2010."

U.S. marketed gas production is projected to decline by 0.3% to 58.42 Bcf/d this year and decline again in 2010 to 57.83 Bcf/d, the EIA said. The Baker Hughes Inc. natural gas rig count has fallen to slightly less than 800 as of April 9 from slightly more than 1,600 in August 2008. "The precipitous drop in drilling activity and declining productivity of wells already in place are expected to cause production to steadily decline as the year progresses. The resultant impact of lower production in the Lower 48 non-Gulf of Mexico (GOM) during the second half of [this year] is expected to more than offset higher year-over-year production during the first half of the year. Additional supply curtailments may be necessary as natural gas storage levels approach capacity later this summer," it noted.

The EIA projects than Lower 48 non-GOM production will fall to 50.79 Bcf/d this year from 51.11 Bcf/d in 2008, and will decline even further in 2010 to 50.46 Bcf/d.

Marketed production from the federal GOM, however, is expected to increase by 1.9% to 6.53 Bcf/d this year because of continued recovery from the 2008 hurricane season and new supplies associated with the start-up of offshore oil production facilities, according to the EIA. But "despite expectations of higher prices and the recovery of drilling programs next year, total production in 2010 is expected to be lower in both the Lower 48 non-GOM [50.46 Bcf/d] and federal GOM [6.25 Bcf/d] regions," the agency said.

Total natural gas consumption is projected to slide by 1.8% to 62.39 Bcf/d this year and remain relatively unchanged in 2010 at 62.52 Bcf/d, according to the EIA. It "expects the current decline in economic activity will have a significant impact on natural gas consumption in the industrial sector, which is forecast to fall by 7.4% this year [to 16.82 Bcf/d from 18.15 Bcf/d in 2008]. In the residential and commercial sectors, where consumption is influenced more by weather than by macroeconomic conditions, natural gas use is expected to increase slightly in 2009" to 13.40 Bcf/d and 8.55 Bcf/d, respectively, before seeing a modest drop in 2010, the EIA said. The agency sees gas demand by the electric power sector rising to 18.32 Bcf/d this year and to 18.68 Bcf/d in 2010 based on lower gas prices relative to coal.

"The [overall] outlook for natural gas consumption in 2010 remains subject to uncertainty about the status of future economic conditions. If the economy begins to recover later this year as [is] currently expected and weather remains near normal, small consumption growth in the industrial and electric power sectors should be offset by small declines in the residential and commercial sectors."

On the LNG front, imports are expected to rise to about 480 Bcf this year from 352 Bcf in 2008 because of lower global economic activity and the start-up of new liquefaction capacity in the Middle East and other parts of the world, the EIA said.

"Depressed LNG demand in Asia and Europe should tend to increase the amount of LNG available to the United States. However, the LNG projection is subject to considerable uncertainty. Initial production from new liquefaction capacity has been slowed or delayed for extended periods, and U.S. natural gas demand is also projected to be lower [this year]. As a result, expanded LNG flows into the United States likely would depend on there being less domestic natural gas production or imports from Canada than forecast. In the current [EIA] Outlook, U.S. pipeline imports are expected to decline by about 1% [to 8.78 Bcf/d this year].

Working gas in storage at the start of this month was 1,674 Bcf, or 310 Bcf above the five-year average and 438 Bcf above the level during the corresponding week last year, the EIA said. "This year's end-of-March working natural gas storage level was the second highest recorded since 1991, exceeded only by the 1,692 Bcf recorded at the end of March 2006. Working natural gas inventories are projected to rise to possibly new record-high levels by the end of the summer injection season."

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