Given the massive gas storage surplus (46% above the five-year average), many market experts are wondering exactly how low gas prices will have to go in order for gas to begin replacing coal-fired generation this summer. That extra gas demand certainly will be needed. The question is whether it will be enough to slow storage injections so that producers won't be forced to shut in their wells.
"If we don't get some of the coal market, it's going to be hard to beat down that gas surplus and probably hard to make a living if you're a producer," said energy consultant Stephen Smith in an interview with NGI. "My model wants to take gas down to $5 on average this summer just to get season-ending storage levels down to 3.7 Tcf.
"Even if we get a summer as hot as last year, that's probably not going to do the job in terms of getting storage injections down enough so that it all fits in," he said. "You're going to have to see some shut-ins due to hurricanes -- it doesn't have to be a Katrina, but maybe a pair of Dennises or something. If you don't, there is only one way to squeeze it in. Producers are going to say, 'I just paid $4 for it in the ground; why should I sell it at $5?' They'll just shut it in, which is what they used to do."
However, it is surprising that producers could be running to shut in their wells only months after hitting the jackpot with the highest gas prices ever. "It's one of those ironies," said Smith. "It's almost because of the record prices last winter in the sense that we were missing the gas but more than offset that with a combination of operational and economic shutdowns. It's a big glut. Everything I have looked at shows that consumers -- while the price of gas has gone down -- will continue conserving. By heating degree day, residential and commercial demand is coming in lower by 1-2%. That's the problem."
Even if prices average $5.00 this summer, Smith said he's still predicting that working gas storage will reach levels never seen before. The theoretical maximum level of working gas capacity is 3,731 Bcf, according to NGI's 2004 survey of the nation's storage operators. There's 4,298 Bcf of working gas capacity in all of North America (see http://intelligencepress.com/ancp/storage.html).
"Everybody is kind of working the economics right now to find out what gas price it's going to take to move marginal coal plants off the dispatch curve," said consultant Ron Denhardt of Strategic Energy and Economic Research. "You might get 750 MMcf/d more gas demand this summer from fuel switching (from residual fuel oil to gas)." But it's very difficult to say how much additional gas demand could be created by gas-fired generation beating marginal coal on the dispatch curve, he said.
"It could be a lot. It depends a lot on when you are looking. If you are looking at June, July and August, that marginal coal plant is probably pretty inefficient. All the good plants are going to be running all out. If you are looking at September and October, there may be some pretty efficient coal plants out there that are not running all out because demand is lower."
Smith noted that the gas market already has most likely captured most of the potential demand from residual fuel oil switching. With gas prices holding a $1.80 discount to resid (New York 1% No. 6 oil), there's clearly no economic reason to burn resid rather than gas if you have the option to switch fuels.
The latest shoulder month statistics from the Energy Information Administration prove that point, showing petroleum liquids consumption by power generators was down 29% in March to 4,206,000 bbl compared to March 2005. Natural gas consumption from power generation was up 19% to 454,191 MMcf (14.65 Bcf/d) in March. Coal consumption was up 1.6% to 83,485 short tons.
"As you get into the summer some of the impacts of gas being a lot lower priced will start showing up significantly," Smith noted. "But right now it doesn't look like we are going to get a lot of heat in the East, according to the latest weather maps." He noted that the National Weather Service's Climate Prediction Center currently is predicting equal chances of below or above normal temperatures across the entire Northeast, Mid-Atlantic, Great Lakes, Midwest and Midcontinent regions. Above normal temperatures are forecast for the Southeast, Gulf Coast, Southwest, West Coast and Rockies.
"The hurricane risk could prevent us from breaking $5 even though the storage glut remains," Smith added. "But if we get past some of that hurricane threat and we have more than 3 Tcf in storage with more to go in the injection season, that's when we could see a big hit and break below $5, provided that oil doesn't do something strange."
Intelligence Press Inc. All rights reserved. The preceding news report
may not be republished or redistributed, in whole or in part, in any
form, without prior written consent of Intelligence Press, Inc.