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EIA Remains Bullish on Gas

EIA Remains Bullish on Gas

In the latest of a string of bullish reports for the gas industry, the Energy Information Administration's (EIA) recently-published Short-Term Energy Outlook projected prices in the coming months to be 25% to 30% higher than last winter. It also said that demand, which the EIA said rose by less than 1% in 1999 compared to 1998, is poised to grow 4.6% in 2000. The demand jump, which puts the consumption level at 22.4 Tcf, represents an increase of 1 Tcf over 1999's consumption levels.

These large increases are in line with other reports issued recently that also predict major increases. In November, the EIA's Annual Energy Outlook predicted gas prices would increase 1.7%/year to finish at $2.81/Mcf by 2020. Earlier this month, the National Petroleum Council issued a forecast calling for a 32% increase in demand over the next 10 years. This increase would put gas demand at 29 Tcf by 2010 (see NGI, Dec. 20).

On the pricing side, the EIA's new study admitted that its price increase percentage was skewed because last winter's prices were greatly depressed. In addition, oil prices were also depressed during that period, and the two worked together to hold down the price of gas during that year. "Nevertheless," the EIA said, "because of the depressed gas prices seen last winter, the average wellhead price this winter will be notably higher (about 25% to 30%) than last winter's price of about $1.80/Mcf."

Aiding this winter's price strength are storage levels. Although they are currently more than the average of the past three years, they are also almost 200 Bcf less than the level recorded at the end of 1998. Looking ahead to the next two years, the EIA expects gas prices to remain flat.

Interestingly, the EIA said that if prices act as this study predicts, then natural gas' advantage as the preferred fuel for electric generation may be harmed. Thanks to a range of factors, including the decline in use of oil for power generation under current prices, lagged effects of the oil price increases occurring since last spring, and impact from downstream stockpiling in late 1999, oil prices are expected to fall in 2000 and 2001, giving gas competition for electric generation.

After sinking 3% in 1998, the EIA said gas demand experienced a slight rebound of 0.8% in 1999. Thanks to a warmer-than-expected fourth quarter, residential and commercial demand only experienced "scant improvement" over 1998 levels.

Going forward, all sectors are expected to demonstrate healthy demand growth, with consumption levels expected to reach 22.6 Tcf by 2001. The demand push will be led by the residential and electric sectors, the EIA said, with improvements of 7.3% and 8.4% in 2000 over 1999's levels.

Imports will continue to skyrocket, the report said. After posting an 11% increase in 1999 over 1998 levels, imports are expected to jump another 7.3% next year and another 4% in 2001. These increases are based on the oncoming influx of gas from Canada from such projects as the Northern Border pipeline and the soon-to-be-in-service Alliance project.

John Norris

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