Bentek: Midwest Demand Grows Only with Lower Gas Prices

A new study by Lakewood, CO-based consulting firm Bentek Energy shows Midwest/Midcontinent natural gas production growing only slightly over the next few years and demand being driven higher only if high gas prices don't push new gas-fired power plants out of the market.

Using historical trend analysis, Bentek's base case scenario predicts that natural gas production from the offshore Gulf of Mexico, Louisiana, Texas, Oklahoma, Kansas and Michigan, will fall by 1% and then grow by 2% over the next three years, with increases in the offshore Gulf and Louisiana offsetting declines or flat supply in the other states. Texas production is expected to grow by less than 1% in each of the next three years. Oklahoma is expected to see an increase of 1.6-2% through 2006.

"The real issue in the report is on the supply side," said Bentek President Porter Bennett. "Even looking at the historical trends, there's just nothing growing. Louisiana and the offshore Gulf of Mexico are the only places where production is growing. Texas production is expected to be basically flat. It's going to be hard to change that in the short-term."

Kansas natural gas production is expected to decline by about 7% in each of the next three years, reflecting the maturity of the Hugoton Field. Under Bentek's base case scenario, production in Michigan is expected to fall by nearly 4% in each of the next three years mainly because of declines in the Antrim shale.

Texas is expected to see only 0.5-1% growth in each of the next three years. And the offshore Gulf is expected to benefit from higher gas prices, which Bentek believes will lead to an average of about 8% production growth in each of the next three years, offsetting struggling or decline production in other areas covered in the study.

Meanwhile, gas demand in the 15 states in the study area is expected to rise by 6.5% by 2006 from 2002 levels, driven largely by demand from new gas-fired power generation. Sharply higher demand from power generators is expected to offset sharp declines in demand from industrial users. Residential and commercial demand over the period is expected to remain flat.

In the Upper Midwest, demand is expected to grow by 229 Bcf, or 627 MMcf/d, between 2002 and 2006 and will account for 40% of base case demand growth in the entire 15-state study area. Increasing power generation demand is expected to drive growth in the Upper Midwest, offsetting a 54 Bcf decline in industrial demand over the same period.

In the lower Midwest/Midcontinent, base case demand is projected to grow by 170 Bcf or 466 MMcf/d between 2002 and 2006 and will account for 30% of the total growth for the study area. Once again, power generation demand is expected to offset an 18 Bcf decline in industrial demand. Power generation demand also is expected to lead to growth in Texas and Louisiana, where total demand is projected to increase by 160 Bcf or 438 MMcf/d between 2002 and 2006 and account for 30% of the total growth in the study area.

However, Bennett said that today's high gas prices actually make even Bentek's low demand scenario unlikely. "High gas prices make the whole power use suspect. If you look at it, there is growth forecast for the Midwest but it is based on power demand; there's really nothing else growing out there. Power demand actually is expected to offset declines in the industrial sector. One of the main reasons industrial demand is expected to decline is the price of gas."

With extremely high gas prices, "I think it is doubtful you'll see all the power used anywhere as much as we projected it to be used." He said if gas prices reach $6-7 for a sustained period "many of these new plants will be costly to run to play a significant role in the regional dispatch."

Bennett noted, however, that any addition of new gas-fired generation in the region is unlikely to push out older less efficient gas-fired generation because there simply isn't much older gas-fired capacity in the region. As a result, any additional gas-fired generation represents an incremental increase in demand unless the plants are sitting idle because of high gas prices and small spark spreads.

For more information on the Bentek study, contact Porter Bennett at (800) 364-5687.

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