Natural gas consumption by the electricity sector, which was approximately 16 Bcf/day last year, is expected to grow by as much as 2 Bcf/d annually during 2002 and 2003, according to an analysis conducted by Houston-based Simmons & Co. International.

Their projection was reached after allowing for anticipated higher utilization rates for lower marginal-cost fuel sources, capacity creep from nuclear and coal-fired generation, and gas-on-gas competition, Simmons said in its analysis of the “Dynamics of Electricity-Driven Natural Gas Demand.”

The energy-related investment banking firm estimated that higher utilization rates for nuclear, coal and hydroelectric generation capacity would displace about 600 MMcf/d of gas demand in the power sector over the two-year period; capacity creep (nuclear- and coal-fired facility upgrades) could potentially displace an additional 300-400 MMcf/d of gas demand; and gas-on-gas competition — the replacement of older, less efficient gas-fired generation capacity with new gas-fired capacity — would account for a total loss of 8-10 Bcf/d of potential gas demand in 2002 and 2003. In addition, Simmons said fuel switching from gas to oil could further cut electricity-related gas demand by 1-2 Bcf/d.

Despite these factors, Simmons’ analysts said “there will not be a material decline in electricity-related gas demand” during 2002 and 2003. “However, how much gas demand growth we experience will in large part be determined by overall demand for electricity,” they noted, adding that they do not expect to see a pick-up in demand until “at least the second half of 2002.”

Simmons analysts limited their projections to a two-year window “because of [the] lack of visibility in supply and demand fundamentals and pending environmental legislation.” In addition, they based their predictions on their belief that only about 45,000 MW of new generation capacity per year “can realistically come online” in 2002 and 2003.

“Market conditions surrounding the Enron debacle, liquidity issues and declining spark spreads have led to a pullback [in] project development. As a result, we have assumed that only projects currently in construction will continue to move forward and be completed,” the analysts said.

Approximately 20% of the generation projects that were expected to be completed last year experienced construction delays, according to the analysts. “We expect this trend to continue in 2002 and 2003.”

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