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FERC Market Update: Gas Prices Have Hit Resid Floor

Now at the $8+ level, natural gas prices have reached their alternative fuel (resid) floor and are unlikely to go much lower this winter unless the "extraordinarily warm" weather would continue right on through February, according to a market update presented at the Federal Energy Regulatory Commission (FERC) meeting last Wednesday.

"At current resid prices it is unlikely gas can fall much further this winter," Steve Harvey, deputy director of FERC's Office of Market Oversight and Investigation, said, pointing out that gas prices tend to run in between the equivalent price of resid and heating oil in New York. They are operating at the lower end of that range, and in fact "have met their effective floor in New York." While the relationship may differ somewhat in other parts of the country, nevertheless "oil has a strong influence on gas prices."

A scenario where the alternative fuel floor would not hold and gas prices could plunge further would be "if so much inventory was still in storage at the end of the winter that physical operations required its owners to remove it no matter what the price. This is unlikely unless current weather conditions continue through February," Harvey said.

He cited the "ninth warmest November in 111 years," the exceedingly warm weather running from the second part of December to date, and predictions it may continue for at least a couple more weeks as the reasons gas inventories are so high currently. The National Oceanic and Atmospheric Administration (NOAA) shows heating degree days for the first two weeks of January were only 66% of normal.

"It doesn't look like we have any arctic air on the horizon," said Mike Halpert, head of forecast operations at NOAA's Climate Prediction Center in an interview with NGI on Thursday. "We do have a weak La Nina in the Pacific Ocean and that does favor some cold developing at least in the Northern Plains, but we really haven't seen that pattern set up yet. We're pretty confident that over the next two weeks we aren't going to see any of that arctic air. In February, the pattern could certainly change." NOAA's February temperature outlook was released on Thursday showing above normal temperatures continuing over the Northeast, Mid Atlantic, Great Lakes, northern portions of the Southeast and much of the Southwest and California. The only chances of below normal temperatures were concentrated over parts of the Northern Rockies and Pacific Northwest.

There's no denying that the weather has been a major factor in driving prices down this year. But "there is something else going on as well," said Harvey. FERC staff now is doing some research into why there appears to be a lower level of storage withdrawals for every degree of cold weather this winter. Harvey said it's unclear whether that is due to greater than expected supply entering the market or because of demand destruction or both.

The out months of the futures market suggest under normal conditions prices will cycle from a $9 summer price to $11 in the winter for the next couple years, Harvey said, until more LNG becomes available.

As for the current LNG situation, preliminary estimates show 2005 LNG imports at 630 Bcf were less than the 653 Bcf brought in in 2004 and considerably less than receiving terminal capacity. This situation could continue for the next several years, because the much more expensive and complex construction of upstream liquefaction facilities does not equal receiving terminal capacity around the world.

"We are starting a new world market on the back of LNG and we don't exactly know where it's going to go," Mark Robinson with FERC's Office of Energy Projects, said. He pointed out that as long as the U.S. offers lower prices, spot cargoes will go to other countries offering more. Spain has been paying $12/MMBtu and Japan $17/MMBtu, he said. More liquefaction facilities are being built, but there will likely always be more receiving capability than liquefaction.

Last year 70% of U.S. landed LNG came from Trinidad, and Algeria was the country's second largest supplier, said Jeff Wright, also from the projects office. In recent months, however, Egypt has become the second largest supplier to the U.S.

Wright said the five new regasification terminals currently under construction in the U.S. would add 9.2 Bcf/d in capacity. These are Sempra Energy's Cameron LNG facility in Louisiana; Cheniere Energy's Corpus Christi, TX plant; its Sabine Pass, LA, terminal and its Freeport, TX, facility; along with ExxonMobil's Golden Pass LNG near Port Arthur, TX. Expansions already planned for the Cameron, Sabine Pass and Freeport terminals would add 5.1 Bcf/d.

In addition, existing facilities have expansions underway that will yield another 1.1 Bcf/d of sendout capacity in the short term, Wright said, pointing to Southern Natural's planned addition next month of 0.5 Bcf/d in peak sendout capacity at its Elba Island facility and the 0.6 Bcf/d increase going online in the spring at Trunkline LNG's Lake Charles, LA, terminal. Southern also has another 0.9 Bcf/d expansion in the works for Elba Island.

On the liquefaction side, Lake Charles will be receiving the first shipment next month from a fourth LNG train in Trinidad that began production in November, and Nigeria started up its fifth train recently. Nigeria LNG says it will be shipping about 1 Bcf/d to the U.S. market when its sixth train comes online in 2007, Wright said.

There now is more information available on spot LNG cargoes. The Department of Energy's Office of Fossil Energy began tracking spot deliveries of LNG to the U.S. last October. Its statistics show seven spot cargoes of 20.4 Bcf in October, or 34% of the nearly 60 Bcf in total deliveries for the month, and five spot cargoes, bringing in 14.6 Bcf, in November, or 25% of total LNG imports that month, Wright said.

The commissioners questioned FERC staff as to the level of demand destruction from the high prices over the last few months of 2005, noting reports that it might have been less than expected. Harvey said staff now has in hand pipeline flow information and would be studying that to determine demand strength.

Joseph Kelliher said the market update presentations "are very helpful, and I'm glad we do it in a public setting because I think it really helps people in the market, consumers, and state regulators understand some of the facts that are governing the gas market this winter."

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