Calling 2000 a watershed year for the natural gas market issomewhat akin to saying 1776 was an important time in U.S. history.With only a couple of exceptions, last year began with all spotprice indexes between $2 and $3. It ended with January 2001 indexesranging from $8.56 (Questar) to $18.81 (Transco Zone 6-NYC).
Along the way, NGI’s previous spot price record of $39 at theChicago citygate, set in early February 1996, was shattered severaltimes. The new record stands at $69 at the Southern Californiaborder, established in Dec. 11 trading. That same day all otherWest Coast points (PG&E citygate, Malin, Sumas, Stanfield andKingsgate) registered highs that beat the old Chicago record.
Prices have seen spikes in previous years at certain points orin specific regions due to severely hot or cold temperatures,transportation constraints, a hurricane or whatever. But thosespikes were short-lived and seemed larger because they contrastedwith a base market at $2-3 or so. The key difference in 2000 wasthat except for minor retrenchment here and there, high pricesshowed no signs of subsiding and were built on a base of $8-10 ormore toward the end of the year.
The cash increases were based mostly on weather, storage andother supply-demand fundamentals, but they also got plenty ofsupport from futures. Gas futures contracts kept notching newhighs, especially towards the end of 2000. The climax came Dec. 27when the January 2001 contract briefly surpassed $10 and settled atthe all-time high of $9.98. Other parts of the energy complex atNymex also contributed. Although crude oil was below $30/bbl at theend of the year, it spent some time earlier in the vicinity of $37.And heating oil futures were very strong as worries of a wintershortage increased.
There was no indication of a monster market in the makingthrough the early part of the year. May indexes were stillrelatively tame on either side of $3. But a hint of what was tocome appeared when nearly all June indexes rose by a dollar ormore. Then two conditions combined to get the 2000 price rampagelaunched: more gas-fired air conditioning load than the market hadever seen before, and concerns throughout the summer and fall thatthe routine refill of storage facilities was going more slowly thanusual and might prove inadequate for heating season needs.
As storage injectors competed with power generators for the samemolecules of gas, the impact of a drilling slowdown spawned by lowprices in the late 1990s began to be felt more acutely. Althoughthere was enough supply to go around, buyers had to ante up moreand more money to get their share. The result was monthly indexesthat kept reaching new heights in the latter half of the yearexcept for retreats in the August and November bidweeks. And thoughOctober was a major exception in which aftermarket prices fell50-60 cents or so below indexes, in other months day trading quotesspent most of their time in index-plus territory.
The hypervolatility of 2000 produced some unprecedented marketdistortions. Even when Chicago was hitting $39 in February 1996, itstill averaged just under $18.50 that day, only about $4 aboveHenry Hub. Contrast that with Sumas and Northwest-domestic, twopoints that under normal market conditions trade at near parity, inDec. 8, 2000 business. Thanks to a long series of OFOs andentitlements for the northern half of the system by NorthwestPipeline along with cold Pacific Northwest weather, Sumas commandeda premium of nearly $40 over the domestic product that day. TheNorthwest actions also had Stanfield and Kingsgate settingpoint-specific records during December.
Toward the end of the year there was an explosion of basis atsome points. As California continued to struggle with powerproblems, gas traders gasped in amazement as September basis at theborder averaged just under plus 250. But that was just forstarters, even though October and November basis averages slippedback to less than plus 50. In the December bidweek border basispeaked at plus 780 and averaged a little more than plus 651. ForJanuary 2001, quotes got only as high as plus 715, but there weremore large reports to push the average to plus 663.50.
However, the California border’s peak of plus 780 didn’t lastlong 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 asquotes for Texas Eastern M-3 and Transco’s New York City andnon-NYC pools in Zone 6 topped off at plus 500, 700 and 850respectively. But although Zone 6 (NYC) now holds the basis record,its average in that bidweek was only plus 579, well short of theCal border average.
An interesting phenomenon in indexed contracts developed late in2000. Normally traders report a deal at index plus or minus a fewcents. For December, however, some sources said they boughtSouthern California border gas at the NGI index plus a dollar ormore. As it turned out, those proved to be wise decisions as borderprices immediately skyrocketed in the aftermarket and stayed muchmore than a dollar above the $14.08 index throughout the month.
Index premiums got even heftier for this month when one sourcereported several Transco Zone 6 (NYC) purchases at index plus$1.50-2.00. However, that strategy is backfiring compared to theCalifornia case a month earlier. For last Friday’s flow, Zone 6(NYC) numbers averaged $10, nearly nine dollars under the $18.81index.
Consumers started getting warnings of sharply higher winternatural gas and heating oil prices in early fall, and the barrageof utility advisories, disseminated primarily through local newsmedia, kept accelerating as the heating season approached. In anelection year, that naturally created a political football aslawmakers and other officials promised investigations and otheractions to keep the fuel costs in check.
California spent much of the last half of 2000 in a power crisisthat drove two major utilities to the brink of bankruptcy. That wasexacerbated by record-setting gas prices that made California themost expensive market of 2000 and the fact that much of the state’spower generation is gas-fired. Price caps on electricity made itimpossible for a gas-using plant to sell its output within thestate without losing money while daily border, PG&E citygateand Malin prices were averaging in the $40s and $50s during part ofDecember.
An explosion on El Paso’s South Mainline in New Mexico in Augustkilled 12 people, put a crimp in gas deliveries to California andeast-of-California markets and made the case for buildingmuch-needed new pipeline infrastructure in other regions a muchharder sell to regulators, politicians and residents.
The extremely bullish market has taken a toll on midstreamoperators. A number of processing plants, primarily in the GulfCoast, have suspended or greatly reduced activity in recent monthsfor economic reasons. The Btu content of liquids made them worthmore left in the gas stream than taken out as separate products.
However, the processing cutbacks have led in turn to problemswith gas failing to meet pipeline quality specifications. A numberof pipes in late 2000 issued OFOs (or warned of their possibility)or took other action to guard against gas streams with excessiveliquids that could threaten operational integrity or causedownstream safety concerns.
A producer noted that he has a processing plant in Texas that’sbeen shut down since November, but luckily the gas stream it servedwas lean enough to continue meeting pipeline qualityspecifications. However, he has been forced to shut in some HIOSgas because of an ANR OFO against unprocessed production withexcessive Btus. It’s almost impossible for a processor to make anymoney under current conditions, he said, but it’s quite likely thatproducers may be offering extra processing fees to get their gasinto 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 manyprocessors produced a corollary development when some industrialfirms for whom gas is a major commodity cost, such as chemical orfertilizer makers, found they could make more profits by at leasttemporarily abandoning their normal business and re-selling theirgas contracts (in either physical or futures form). There wasanother side of that coin, however. Some businesses such as flowergrowers or agricultural firms, especially in California, said theyfaced financial ruin from not being able to afford gas to heatgreenhouses or dry food products.
One of the most remarkable aspects of the super-bullishness ofthe last half of the year was that it occurred during a benignhurricane season. Although the 2000 Atlantic season was, aspredicted, an active one with 14 named storms including eighthurricanes (three of them considered major), there were nosignificant disruptions of Gulf of Mexico production.
So what can we expect in 2001? Few sources see any chance ofsustaining the incredible heights of last year, but they believeprices will continue to reign at loftier levels than during the1990s.
Analysts at Raymond James & Associates, Salomon SmithBarney, WEFA Inc., Petrie Parkman & Co. and UBS Warburg andbean counters at the Energy Information Administration (EIA) allpredict gas storage levels will end the winter at a record low,which should keep prices high throughout the year. EIA expectswellhead prices to average $5.20/Mcf in 2001 compared to anestimated $3.70 in 2000 (72% higher than in 1999) and about $4.50projected for 2002. EIA said gas storage levels at the end ofDecember were lower by 10% than the previous record low for thatmonth set in 1976. Many observers agree that storage could becompletely depleted or reduced to the lowest level possible byApril 1.
EIA expects gas demand to grow by 2.9% in 2001 and by 2.7% in2002, compared with estimated demand growth of 4.5% in 2000.However, gas demand from non-utility electricity generation in 2001is expected to be up by a solid 9%.
Meanwhile, a record high rig count (886 U.S. gas rigs drillingas of Friday compared to 638 a year earlier) is expected to pay offeventually in higher gas production, but opinions are mixed on howfast production will grow. Analysts at Salomon Smith Barney and EIAexpect North America gas production to grow by between 5% and 6%this year; while others observers, most notably the producers atIndependent Petroleum Association of America, say the growth willbe less than half that much because mature fields are yielding lessgas. The latter scenario surely would mean the wild ride thatlasted through 2000 is only the beginning of a very difficult tripahead.
Roger Tanner, Houston
©Copyright 2001 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.
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