EIA: Production Up, Prices To Stay Above $4

Natural gas production is on the upswing, according to Energy Information Administration's November Short Term Energy Outlook. The agency said the "torrid pace" of gas drilling activity in North America is starting to pay off. As a result, wellhead gas prices should ease further away from the $5/Mcf level through 2001 than previously projected. Prices this winter, however, should stay above $4.

With the U.S. natural gas rig count at a high of 845 as of Nov. 3, EIA has increased its estimate for production growth in 2001 to about 350 Bcf (1.9%) from its earlier forecast of 240 Bcf (1.3%). The agency continues to predict gas production will grow by 0.7% for 2000.

Net imports of gas are expected to rise by 12% in 2001, coinciding with the installation of the new 1.325 Bcf/d Alliance pipeline. The pipeline which travels from western Canada to the U.S. Midwest has experienced numerous start-up delays, most recently being pushed back to late November (see related story this issue). EIA is unsure of what Alliance's impact on supply will be, mainly because much of the contracted volumes are likely to come off of other Canadian lines particularly the TransCanada system.

"Although high oil prices have contributed to the current strength in gas prices, the predominant reason for these sustained high gas prices was, and still is to some extent, perceptions about the supply situation going into the winter," the agency said.

The agency expects November will be the true measuring stick for gas supplies and prices over the rest of the winter heating season. Underground working gas storage levels are currently about 8-9% below year-ago levels, according to EIA. Historically the last month in which gas is put into the ground, a cold November could decrease injections and send spot prices over the $5.00 mark again. However, if the weather turns unseasonably warm, "spot gas prices would be expected to fall sharply." As always, the weather will be the key factor determining the direction of the gas market this winter, EIA noted.

"We are projecting that natural gas prices at the wellhead will increase by about 90% this winter (October-March) compared to last winter. Of course, higher end-use prices will result from higher projected wellhead prices. If our base case projections hold, residential prices for natural gas would be about 29% higher than last year during that period. For the entire year 2000, the average wellhead price for natural gas is projected to average $3.37/Mcf."

On the natural gas supply and demand front, EIA forecasts the overall gas demand growth for 2000 will be 3.3%, down a little from the agency's October prediction based on recent monthly data. Likewise, natural gas demand growth is expected to slump in 2001 to 2.1% primarily reflecting higher gas prices relative to fuel oil prices, EIA predicted.

For this winter, the study shows gas demand will be up 5.1% over last year's winter demand levels, assuming normal weather which implies an 11% rise in gas-weighted heating degree days over last winter. For the residential and commercial sectors in the fourth quarter, demand for natural gas is expected to rise between 10 and 11% over last year's numbers for the same time period due largely to the forecast for a normal winter. In the Industrial sector, demand is expected to increase by 6.4% in 2000. On the other hand, EIA predicts electric utility gas demand will decline by 2.7% due to the trend of utilities selling their plants to unregulated generating companies which are classified as part of the industrial sector. The agency expects gas demand among the industrial and utility sectors to record flat or slightly declined growth for 2001 because it expects fuel oil will gain the price advantage over natural gas.

"In the fourth quarter of 2000, previously falling demand for oil-fired generation is expected to turn around relative to gas-fired generation, as the price differential between fuels in the electricity generating sector shift to favor oil, causing those plants which can switch to oil to do so," stated EIA. "The favorable price differential for oil relative to gas is expected to continue through 2001."

Electricity demand growth is forecasted to be somewhat lower than the October Outlook at 2.2% in 2000 and 0.9% in 2001. Based on a normal winter, electricity sales by electric utilities are expected to be up by 2.9% over last winter.

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