Citing the market’s jitters over strapped gas inventory levelsas it faces the prospect of a much colder winter this year, theEnergy Information Administration (EIA) last week projected thatwellhead prices will stay above the $5/Mcf mark throughout thiswinter, fueling price hikes of about 40% for residential gascustomers.

Driving these high prices will be the dangerously low level ofnatural gas stocks, the Department of Energy (DOE) agency said inits Short-Term Energy Outlook for December. In fact, it estimatesthat a record-low level of gas (640 Bcf) will be in inventory atthe end of the first quarter of 2001, which is half the amount thatwas in storage at the end of winter in early 2000 (1.15 Tcf).

The EIA forecasts gas prices at the wellhead this winter willaverage about $5.60/Mcf, more than double the price a year ago, ifthe weather is normal. The average wellhead price for the year willbe about $3.60/Mcf, up 73% from 1999, the agency predicts.

It expects these high prices to spill over into 2001 due togreater heating demand, low inventories and beefed-up demand bypower generators. These factors “will probably prolong themuch-above-normal price environment through 2001, even if a decentturnaround in U.S. and Canadian production materializes for 2001,”it said. The agency sees wellhead prices remaining above $4/Mcfnext year.

The agency’s bullish price forecasts are in line with the recentactivity of wellhead prices, which have been averaging more than$6/Mcf, eclipsed the $8/Mcf mark on Dec. 6 and crossed $9 lastThursday. The “predominant reason for these sustained high gasprices was, and still is, apprehension about the supply situationthis coming winter…The lower inventory situation, combined withfickle weather, has put the market in a very jittery position.”

These factors have had the most noticeable effect on theCalifornia market, where prices for gas delivered to the SouthernCalifornia border surpassed $60/Mcf on Friday. In addition,”pipeline constraints on the El Paso pipeline have… helped toboost gas prices in California and have caused interruptible gascustomers to be cut off,” the DOE agency reported.

The high wellhead prices are being reflected in residential gasprices, which the EIA projects will average about $9.21/Mcf thiswinter compared to $6.56/Mcf a year ago. This 40% price increase,combined with expected growth in heating demand, means householdgas bills are very likely to go up by about 50% this winter, itsaid.

“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 timesoon.

November “ended with lower-than-anticipated gas storage levels,increasing the probability that the heating season will end withrecord-lower levels of natural gas in storage,” the EIA said.

As for replenishing gas stocks, it estimates domestic gasproduction will rise by a paltry 0.7% to 18.79 Tcf this year from18.66 Tcf in 1999. But the agency anticipates a significant boostto production (3.9%) in 2001, rising to 19.53 Tcf.

And while it expects net imports (mostly from Canada) to rise7.3% over last winter, the EIA has doubts about whether the newAlliance Pipeline will be a major contributor of additional gassupply to the United States. “Even if Alliance is near capacity atmid-winter, it is highly likely that a substantial portion of thevolumes contracted for delivery on the system will have beendecontracted from other systems, particularly the TransCanadaPipeline system. Thus, it is an important question just howsignificant Alliance will be with respect to net new supply fromCanada.”

While gas stocks are continually being squeezed, gas demand isexpected to rise by 5.9% this winter, according to the EIA. Itprojects overall gas demand will increase 3.7% to 22.36 Tcf for2000, and 3.8% to 23.38 Tcf in 2001. The latter figure is based on”high weather-related demand in the first quarter and continuedgrowth in demand for gas by the power-generating sector as newgas-fired plants come on line.”

For 2000, gas demand by industrial power generation is likely tobe up 18.6% over last year, but will grow at a “somewhat slowerpace” of 11% next year, the EIA said. Demand by utility generatorswill remain about level with consumption rates this year, and isexpected to remain flat in 2001, the agency noted. The lower growthwill be partly owing to a “reversal in prices of natural gasrelative to oil and a slowing in the growth rate of electricitydemand.”

While overall electricity demand rose 3.2% to 3,592 billion kWhduring 2000, the EIA anticipates that growth will slow by half to1.6% next year, with demand estimated at 3,648 billion kWh.

During the past year, utility generation used natural gas togenerate 287.8 billion kWh, down from 296.4 billion kWh in 1999. Atthe same time, demand by industrial power generation produced 313.3billion kWh using gas, up substantially from 287.5 billion kWh in1999.

Susan Parker

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