Federal government prognosticators last week reported thatdemand for natural gas will slow considerably during 2001, but spotgas prices nevertheless are expected to remain lofty throughoutmuch of the year in the face of tight gas inventories.

Gas consumption is projected to grow at a rate of only 2.3% (to23.2 Tcf) this year, which is almost half of the 4.4% growth ratethat was experienced in 2000, the Energy Information Administration(EIA) said in its short-term energy outlook for March. Itattributed the forecasted drop to a sluggish economy and less rapiddemand growth in the industrial and commercial gas sectors. But itexpects a turnaround to occur in 2002, with gas demand rising byabout 4.1% to 24.1 Tcf as the economy picks up again and gasconsumption by power generators continues to grow.

The EIA’s prediction for strong gas prices in 2001 is closelylinked to the current low storage levels. Even if only modest gaswithdrawals from storage occur this month, “we are still likely toend the heating season with the total level of gas in storage belowthe previous low recorded by EIA,” the Department of Energy (DOE)agency said. This precarious storage situation, which is expectedto stay with the industry for much of the year, will keep spotprices well above the $4 mark during 2001, the EIA noted.

“In our view, only a spectacular performance from the U.S. andCanadian gas industry in terms of increased production or anextremely mild summer this year would generate much in the way ofadditional reductions in natural gas prices beyond what has alreadyhappened since mid-winter.”

The EIA projects the industry will end the winter heating season(March 31) with approximately 689 Bcf of gas in storage, which is38% below the previous five-year average. It estimates the industrywill have to inject 2.31 Tcf between April and October in order tohave an average 3 Tcf of working gas in storage at the start of thenext winter heating season. That means about 500 Bcf more gas willhave to be injected over the year to meet the pre-season level forworking gas. “We think that only about 60% of the extra 500 Bcf islikely during the injection season, so that a 200 Bcf deficitrelative to the five-year average is likely” by the end of nextOctober, the EIA predicts.

Consequently, “average monthly gas spot prices below $4/Mcfbetween now and next winter are possible but do not seem verylikely under these circumstances,” according to the EIA. Itanticipates that the average spot prices will begin to dip afterthe close of the winter season on March 31, but then will begin torise to meet the expanding gas demand of power generators thissummer.

“If the summer weather is exceedingly hot in regions thatconsume large quantities of gas-fired electricity (California andTexas, for example), then injections into underground storage forthe next winter would be strained and prices could start risingmore sharply and sooner than expected,” the agency said. “In 2001,the annual average [spot] price is projected to be about $4.73/Mcf.Next year, we expect the storage situation to improve modestly andwith that, a decrease in the average annual [spot] price.”

Even though its foresees some easing of the storage situationnext year, the EIA noted that gas prices will continue to beaffected by “rising production costs and capacity constraints onthe pipelines.” The high costs and tight supply of natural gas areforcing some power generators to turn more to coal and fuel oil fortheir facilities.

Although gas prices in the California energy market have easedup somewhat since December, the agency said it sees no immediateend to the gas supply and deliverability problems that have beenplaguing power generators and other gas customers there. “Thesituation in California is characterized by low gas storage, gaspipeline bottlenecks, high demand and low hydropower. These supplyproblems are following on last summer’s supply problems with noobvious end visible over the next two years.”

The agency projects an increase in domestic production in 2001,but it will be measured growth. It reported that production rose by3.1% in 2000, and will likely increase by 3.3% this year and by2.5% in 2002. Rounding out the supply picture, it said net importsof natural gas (mostly from western Canada) are projected to growby about 15% in 2001 and by another 4% in 2002.

Susan Parker

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