EIA Predicts High Gas Prices Through 2001
Citing the market's jitters over strapped gas inventory levels
as it faces the prospect of a much colder winter this year, the
Energy Information Administration (EIA) last week projected that
wellhead prices will stay above the $5/Mcf mark throughout this
winter, fueling price hikes of about 40% for residential gas
Driving these high prices will be the dangerously low level of
natural gas stocks, the Department of Energy (DOE) agency said in
its Short-Term Energy Outlook for December. In fact, it estimates
that a record-low level of gas (640 Bcf) will be in inventory at
the end of the first quarter of 2001, which is half the amount that
was in storage at the end of winter in early 2000 (1.15 Tcf).
The EIA forecasts gas prices at the wellhead this winter will
average about $5.60/Mcf, more than double the price a year ago, if
the weather is normal. The average wellhead price for the year will
be about $3.60/Mcf, up 73% from 1999, the agency predicts.
It expects these high prices to spill over into 2001 due to
greater heating demand, low inventories and beefed-up demand by
power generators. These factors "will probably prolong the
much-above-normal price environment through 2001, even if a decent
turnaround in U.S. and Canadian production materializes for 2001,"
it said. The agency sees wellhead prices remaining above $4/Mcf
The agency's bullish price forecasts are in line with the recent
activity of wellhead prices, which have been averaging more than
$6/Mcf, eclipsed the $8/Mcf mark on Dec. 6 and crossed $9 last
Thursday. The "predominant reason for these sustained high gas
prices was, and still is, apprehension about the supply situation
this coming winter...The lower inventory situation, combined with
fickle weather, has put the market in a very jittery position."
These factors have had the most noticeable effect on the
California market, where prices for gas delivered to the Southern
California border surpassed $60/Mcf on Friday. In addition,
"pipeline constraints on the El Paso pipeline have... helped to
boost gas prices in California and have caused interruptible gas
customers to be cut off," the DOE agency reported.
The high wellhead prices are being reflected in residential gas
prices, which the EIA projects will average about $9.21/Mcf this
winter compared to $6.56/Mcf a year ago. This 40% price increase,
combined with expected growth in heating demand, means household
gas bills are very likely to go up by about 50% this winter, it
"We expect that high and volatile gas prices will prevail until
[there's] solid evidence that the gas supply situation is easing,"
the EIA noted. But the agency doesn't expect that to occur any time
November "ended with lower-than-anticipated gas storage levels,
increasing the probability that the heating season will end with
record-lower levels of natural gas in storage," the EIA said.
As for replenishing gas stocks, it estimates domestic gas
production will rise by a paltry 0.7% to 18.79 Tcf this year from
18.66 Tcf in 1999. But the agency anticipates a significant boost
to production (3.9%) in 2001, rising to 19.53 Tcf.
And while it expects net imports (mostly from Canada) to rise
7.3% over last winter, the EIA has doubts about whether the new
Alliance Pipeline will be a major contributor of additional gas
supply to the United States. "Even if Alliance is near capacity at
mid-winter, it is highly likely that a substantial portion of the
volumes contracted for delivery on the system will have been
decontracted from other systems, particularly the TransCanada
Pipeline system. Thus, it is an important question just how
significant Alliance will be with respect to net new supply from
While gas stocks are continually being squeezed, gas demand is
expected to rise by 5.9% this winter, according to the EIA. It
projects overall gas demand will increase 3.7% to 22.36 Tcf for
2000, and 3.8% to 23.38 Tcf in 2001. The latter figure is based on
"high weather-related demand in the first quarter and continued
growth in demand for gas by the power-generating sector as new
gas-fired plants come on line."
For 2000, gas demand by industrial power generation is likely to
be up 18.6% over last year, but will grow at a "somewhat slower
pace" of 11% next year, the EIA said. Demand by utility generators
will remain about level with consumption rates this year, and is
expected to remain flat in 2001, the agency noted. The lower growth
will be partly owing to a "reversal in prices of natural gas
relative to oil and a slowing in the growth rate of electricity
While overall electricity demand rose 3.2% to 3,592 billion kWh
during 2000, the EIA anticipates that growth will slow by half to
1.6% next year, with demand estimated at 3,648 billion kWh.
During the past year, utility generation used natural gas to
generate 287.8 billion kWh, down from 296.4 billion kWh in 1999. At
the same time, demand by industrial power generation produced 313.3
billion kWh using gas, up substantially from 287.5 billion kWh in