2000: Year The Market Showed Off Its Muscles
Calling 2000 a watershed year for the natural gas market is
somewhat akin to saying 1776 was an important time in U.S. history.
With only a couple of exceptions, last year began with all spot
price indexes between $2 and $3. It ended with January 2001 indexes
ranging from $8.56 (Questar) to $18.81 (Transco Zone 6-NYC).
Along the way, NGI's previous spot price record of $39 at the
Chicago citygate, set in early February 1996, was shattered several
times. The new record stands at $69 at the Southern California
border, established in Dec. 11 trading. That same day all other
West Coast points (PG&E citygate, Malin, Sumas, Stanfield and
Kingsgate) registered highs that beat the old Chicago record.
Prices have seen spikes in previous years at certain points or
in specific regions due to severely hot or cold temperatures,
transportation constraints, a hurricane or whatever. But those
spikes were short-lived and seemed larger because they contrasted
with a base market at $2-3 or so. The key difference in 2000 was
that except for minor retrenchment here and there, high prices
showed no signs of subsiding and were built on a base of $8-10 or
more toward the end of the year.
The cash increases were based mostly on weather, storage and
other supply-demand fundamentals, but they also got plenty of
support from futures. Gas futures contracts kept notching new
highs, especially towards the end of 2000. The climax came Dec. 27
when the January 2001 contract briefly surpassed $10 and settled at
the all-time high of $9.98. Other parts of the energy complex at
Nymex also contributed. Although crude oil was below $30/bbl at the
end of the year, it spent some time earlier in the vicinity of $37.
And heating oil futures were very strong as worries of a winter
There was no indication of a monster market in the making
through the early part of the year. May indexes were still
relatively tame on either side of $3. But a hint of what was to
come appeared when nearly all June indexes rose by a dollar or
more. Then two conditions combined to get the 2000 price rampage
launched: more gas-fired air conditioning load than the market had
ever seen before, and concerns throughout the summer and fall that
the routine refill of storage facilities was going more slowly than
usual and might prove inadequate for heating season needs.
As storage injectors competed with power generators for the same
molecules of gas, the impact of a drilling slowdown spawned by low
prices in the late 1990s began to be felt more acutely. Although
there was enough supply to go around, buyers had to ante up more
and more money to get their share. The result was monthly indexes
that kept reaching new heights in the latter half of the year
except for retreats in the August and November bidweeks. And though
October was a major exception in which aftermarket prices fell
50-60 cents or so below indexes, in other months day trading quotes
spent most of their time in index-plus territory.
The hypervolatility of 2000 produced some unprecedented market
distortions. Even when Chicago was hitting $39 in February 1996, it
still averaged just under $18.50 that day, only about $4 above
Henry Hub. Contrast that with Sumas and Northwest-domestic, two
points that under normal market conditions trade at near parity, in
Dec. 8, 2000 business. Thanks to a long series of OFOs and
entitlements for the northern half of the system by Northwest
Pipeline along with cold Pacific Northwest weather, Sumas commanded
a premium of nearly $40 over the domestic product that day. The
Northwest actions also had Stanfield and Kingsgate setting
point-specific records during December.
Toward the end of the year there was an explosion of basis at
some points. As California continued to struggle with power
problems, gas traders gasped in amazement as September basis at the
border averaged just under plus 250. But that was just for
starters, even though October and November basis averages slipped
back to less than plus 50. In the December bidweek border basis
peaked at plus 780 and averaged a little more than plus 651. For
January 2001, quotes got only as high as plus 715, but there were
more large reports to push the average to plus 663.50.
However, the California border's peak of plus 780 didn't last
long as the all-time basis record. The opposite corner of the U.S.
was getting into the super-basis act in the January 2001 bidweek as
quotes for Texas Eastern M-3 and Transco's New York City and
non-NYC pools in Zone 6 topped off at plus 500, 700 and 850
respectively. But although Zone 6 (NYC) now holds the basis record,
its average in that bidweek was only plus 579, well short of the
Cal border average.
An interesting phenomenon in indexed contracts developed late in
2000. Normally traders report a deal at index plus or minus a few
cents. For December, however, some sources said they bought
Southern California border gas at the NGI index plus a dollar or
more. As it turned out, those proved to be wise decisions as border
prices immediately skyrocketed in the aftermarket and stayed much
more than a dollar above the $14.08 index throughout the month.
Index premiums got even heftier for this month when one source
reported several Transco Zone 6 (NYC) purchases at index plus
$1.50-2.00. However, that strategy is backfiring compared to the
California case a month earlier. For last Friday's flow, Zone 6
(NYC) numbers averaged $10, nearly nine dollars under the $18.81
Consumers started getting warnings of sharply higher winter
natural gas and heating oil prices in early fall, and the barrage
of utility advisories, disseminated primarily through local news
media, kept accelerating as the heating season approached. In an
election year, that naturally created a political football as
lawmakers and other officials promised investigations and other
actions to keep the fuel costs in check.
California spent much of the last half of 2000 in a power crisis
that drove two major utilities to the brink of bankruptcy. That was
exacerbated by record-setting gas prices that made California the
most expensive market of 2000 and the fact that much of the state's
power generation is gas-fired. Price caps on electricity made it
impossible for a gas-using plant to sell its output within the
state without losing money while daily border, PG&E citygate
and Malin prices were averaging in the $40s and $50s during part of
An explosion on El Paso's South Mainline in New Mexico in August
killed 12 people, put a crimp in gas deliveries to California and
east-of-California markets and made the case for building
much-needed new pipeline infrastructure in other regions a much
harder sell to regulators, politicians and residents.
The extremely bullish market has taken a toll on midstream
operators. A number of processing plants, primarily in the Gulf
Coast, have suspended or greatly reduced activity in recent months
for economic reasons. The Btu content of liquids made them worth
more left in the gas stream than taken out as separate products.
However, the processing cutbacks have led in turn to problems
with gas failing to meet pipeline quality specifications. A number
of pipes in late 2000 issued OFOs (or warned of their possibility)
or took other action to guard against gas streams with excessive
liquids that could threaten operational integrity or cause
downstream safety concerns.
A producer noted that he has a processing plant in Texas that's
been shut down since November, but luckily the gas stream it served
was lean enough to continue meeting pipeline quality
specifications. However, he has been forced to shut in some HIOS
gas because of an ANR OFO against unprocessed production with
excessive Btus. It's almost impossible for a processor to make any
money under current conditions, he said, but it's quite likely that
producers may be offering extra processing fees to get their gas
into a pipeline rather than shutting in. The producer was sure that
"there's a lot of renegotiation of processing contracts going on."
The high prices that soured economic operations for many
processors produced a corollary development when some industrial
firms for whom gas is a major commodity cost, such as chemical or
fertilizer makers, found they could make more profits by at least
temporarily abandoning their normal business and re-selling their
gas contracts (in either physical or futures form). There was
another side of that coin, however. Some businesses such as flower
growers or agricultural firms, especially in California, said they
faced financial ruin from not being able to afford gas to heat
greenhouses or dry food products.
One of the most remarkable aspects of the super-bullishness of
the last half of the year was that it occurred during a benign
hurricane season. Although the 2000 Atlantic season was, as
predicted, an active one with 14 named storms including eight
hurricanes (three of them considered major), there were no
significant disruptions of Gulf of Mexico production.
So what can we expect in 2001? Few sources see any chance of
sustaining the incredible heights of last year, but they believe
prices will continue to reign at loftier levels than during the
Analysts at Raymond James & Associates, Salomon Smith
Barney, WEFA Inc., Petrie Parkman & Co. and UBS Warburg and
bean counters at the Energy Information Administration (EIA) all
predict gas storage levels will end the winter at a record low,
which should keep prices high throughout the year. EIA expects
wellhead prices to average $5.20/Mcf in 2001 compared to an
estimated $3.70 in 2000 (72% higher than in 1999) and about $4.50
projected for 2002. EIA said gas storage levels at the end of
December were lower by 10% than the previous record low for that
month set in 1976. Many observers agree that storage could be
completely depleted or reduced to the lowest level possible by
EIA expects gas demand to grow by 2.9% in 2001 and by 2.7% in
2002, compared with estimated demand growth of 4.5% in 2000.
However, gas demand from non-utility electricity generation in 2001
is expected to be up by a solid 9%.
Meanwhile, a record high rig count (886 U.S. gas rigs drilling
as of Friday compared to 638 a year earlier) is expected to pay off
eventually in higher gas production, but opinions are mixed on how
fast production will grow. Analysts at Salomon Smith Barney and EIA
expect North America gas production to grow by between 5% and 6%
this year; while others observers, most notably the producers at
Independent Petroleum Association of America, say the growth will
be less than half that much because mature fields are yielding less
gas. The latter scenario surely would mean the wild ride that
lasted through 2000 is only the beginning of a very difficult trip
Roger Tanner, Houston