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NGSA Sees Little Pressure on Gas Prices This Winter

October 6, 2008
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Forecasts of moderately higher natural gas demand, a spike in domestic output, a "healthy and comfortable" level of storage, a slightly warmer winter and a stagnant economy point to flat pressure on wholesale gas prices going into the winter heating season, although there may not be an "overnight impact" on consumer bills, according to the Natural Gas Supply Association's (NGSA) winter outlook released last Thursday.

Average domestic gas production is expected to be up 8% to 57.5 Bcf/d this winter from a year ago, the highest level for U.S. production in 35 years, NGSA Chairman Patrick J. Kuntz told reporters at the National Press Club in Washington, DC. "This is really a great story for the supply side of the equation." Overall gas supply for the upcoming heating season, however, will be slightly lower (66 Bcf/d vs. 68.1 Bcf/d last winter) due to less Canadian imports (7.5 Bcf/d) and flat liquefied natural gas (LNG) imports (1 Bcf/d).

Kuntz acknowledged that the current upheaval in the financial markets could change the drilling outlook. "It's kind of hard to dismiss the magnitude of what it seems this country is facing. I would have to think that if prolonged, this kind of a credit crunch can have an impact on drilling...[and] the industry generally."

Winter gas demand is projected to be 78.5 Bcf/d, up 2.4% from 76.7 Bcf/d last winter, the NGSA report said. The biggest growth in demand will come from gas-fired generation (4.1%) during the 2008-2009 heating season, which begins Nov. l and runs through the end of March.

Despite recent Gulf of Mexico hurricanes, which have slowed storage injections, natural gas in inventory going into the heating season is expected to be 3,450 Bcf -- only 95 Bcf less than at the same time last year, NGSA said. All of these favorable factors translate into flat pressure on wholesale gas prices during the winter season, said Kuntz, who also is vice president for natural gas and crude oil sales at Marathon Oil.

But gas consumers could still face higher prices this winter because the gas they will use was injected into storage during the summer when it was "relatively more expensive," he said.

Much of the increased domestic gas production is coming from unconventional plays, particularly shale gas, he noted. Horizontal drilling also has been another big advancement that allows more gas to be produced from a single well.

"The unconventional [gas] is early in its infancy...it is very costly," Kuntz said. While it has significant potential, he said he was "very reluctant" to say that "there's enough there that it has solved all of the [energy] issues," to the exclusion of expanded drilling on the Outer Continental Shelf (OCS).

He said he was hopeful that the next president and Congress will not renew the ban on OCS exploration and production, which expired last Tuesday after being in place for 26 years (see related story). Kuntz said he has a "basic sense of optimism that common sense will prevail" in Washington with respect to the OCS.

He estimated that it would be at least "eight-plus years" before producers can begin to drill in previously off-limit areas off the Atlantic and Pacific coasts and in the eastern Gulf of Mexico. Assuming the OCS remains open, Kuntz said he doubted that lease sales could be held before early 2010, seismic work would be a two-year process, and delineating drilling and development planning would take another three to four years.

"Because domestic production is up and because the price of LNG around the world is much higher than the price for natural gas here in the United States," LNG consumption has dropped precipitously, Kuntz said. "It's not needed in one sense. Domestic production is otherwise filling what LNG would have been required for.

"But I'm not ready to say that our problems are now solved by our own domestic production and, therefore, we'll never need LNG again. I don't accept that."

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