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FERC: Oil Prices, Weak Dollar Affecting Gas Market

March 24, 2008
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A 74% spike in crude oil prices since the beginning of 2006 and a 28% dip in the value of the dollar against the euro have substantially affected the competitive positions of domestic energy industries, affecting imports and exports of both gas and coal, and changing usage patterns for natural gas, according to Charles Whitmore of FERC's Office of Enforcement.

"During 2006 and 2007, the most striking aspect of natural gas prices was their contrast to oil and currency prices," Whitmore told the Federal Energy Regulatory Commission (FERC) Thursday. "U.S. spot gas prices stayed mostly in a fairly narrow band between $6 and $8/MMBtu. Prices in 2007 at the Henry Hub averaged about 3% higher than in 2006. That meant that natural gas was far cheaper than oil for the same heat content almost everywhere and almost all the time in 2007. As a result, generators who could switch from oil to gas almost certainly did so most of the time. That helps account for the fact that natural gas use in electric generation went up by 9% during the year, although oil use also increased."

That pattern has changed since the beginning of 2008, Whitmore said.

"The dollar has continued to fall and oil prices have been as high as $111/bbl, but natural gas prices in the United States have also risen substantially."

"It's been absolutely conspicuous since the beginning of 2006 that we have a different oil and gas pricing regime," Whitmore said. "At least for now it has changed and it has changed radically...if it's going to change back, either oil prices are going to have to fall a lot or gas prices are going to have to rise a lot -- a lot meaning more than $2 or $3 -- and we don't see any indication of that right now."

According to a State of the Markets Report Whitmore presented, the United States received record amounts of liquefied natural gas (LNG) last year, partly because European prices were much lower relative to American prices early in the year. But during the last few months of 2007 competing markets offered higher prices, so that by December the United States had the lowest LNG imports for any month since 2002. Asian buyers, in particular, bought a record amount of Atlantic Basin LNG -- 60 Bcf a month since September, partly to offset nuclear plant outages in Japan (see NGI, Aug. 6, 2007).

"In the future, shipments to the United States will depend on relative demand and prices around the world," Whitmore said. "In some years, imports may be higher than in others, but the basic need for LNG in the United States remains strong. It serves an essential peaking function for the Northeast in the winter and Florida in the summer. It takes advantage of abundant United States gas storage to buy LNG in the summer and deliver it in the winter. And, as production costs rise in the United States, LNG is likely to serve an increasing baseload function for the country as a whole, as it already does for New England."

FERC Chairman Joseph T. Kelliher said performance on the natural gas side "shows how well-functioning our gas markets are in the U.S." Domestic gas production has gone up about 10% since the beginning of 2006 in response to relatively higher prices. This also is related to confidence in this nation's ability to expand the infrastructure.

Even in the face of constraints and reduced prices in certain areas, gas producers continued explore because of the demonstrated ability to quickly get new infrastructure in place. This is in "painful" contrast to the power side. Pipeline projects can get through the regulatory process in months -- an average of 10 months recently -- while power transmission projects can take years, Kelliher said.

Rising domestic natural gas production and the opening of new pipelines to carry gas to markets allowed prices to remain relatively stable until the beginning of this year, despite the decline in LNG imports in the second half of 2007 and more gas usage in electric generators, the report found.

"Natural gas prices in the United States have now been high enough for long enough to see a significant production response," Whitmore said.

The report found that other key factors helping to keep domestic gas prices relatively stable are an abundance of storage and the nation's ability to build out its natural gas infrastructure. Projects placed into full or partial service since the beginning of 2007 -- representing more than $6 billion of investment and 14.3 Bcf/d of new deliverability -- included:

Whitmore said the development of REX has largely eliminated "a major, persistent price difference between producers in the Rockies and customers in the West and Midwest," and left the Northeast as home of the largest remaining price disparities in the country.

"During severe winter weather, New York and New England have long seen occasional periods when local prices rose far above those of other regions, including the Henry Hub," he said. "These periods appear to have become more frequent...It appears that the market is signaling that the next major need for expanded infrastructure would be to deliver natural gas to the Northeast."

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