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EIA Predicts High Gas Prices Through 2001

EIA Predicts High Gas Prices Through 2001

Citing the market's jitters over strapped gas inventory levels as it faces the prospect of a much colder winter this year, the Energy Information Administration (EIA) last week projected that wellhead prices will stay above the $5/Mcf mark throughout this winter, fueling price hikes of about 40% for residential gas customers.

Driving these high prices will be the dangerously low level of natural gas stocks, the Department of Energy (DOE) agency said in its Short-Term Energy Outlook for December. In fact, it estimates that a record-low level of gas (640 Bcf) will be in inventory at the end of the first quarter of 2001, which is half the amount that was in storage at the end of winter in early 2000 (1.15 Tcf).

The EIA forecasts gas prices at the wellhead this winter will average about $5.60/Mcf, more than double the price a year ago, if the weather is normal. The average wellhead price for the year will be about $3.60/Mcf, up 73% from 1999, the agency predicts.

It expects these high prices to spill over into 2001 due to greater heating demand, low inventories and beefed-up demand by power generators. These factors "will probably prolong the much-above-normal price environment through 2001, even if a decent turnaround in U.S. and Canadian production materializes for 2001," it said. The agency sees wellhead prices remaining above $4/Mcf next year.

The agency's bullish price forecasts are in line with the recent activity of wellhead prices, which have been averaging more than $6/Mcf, eclipsed the $8/Mcf mark on Dec. 6 and crossed $9 last Thursday. The "predominant reason for these sustained high gas prices was, and still is, apprehension about the supply situation this coming winter...The lower inventory situation, combined with fickle weather, has put the market in a very jittery position."

These factors have had the most noticeable effect on the California market, where prices for gas delivered to the Southern California border surpassed $60/Mcf on Friday. In addition, "pipeline constraints on the El Paso pipeline have... helped to boost gas prices in California and have caused interruptible gas customers to be cut off," the DOE agency reported.

The high wellhead prices are being reflected in residential gas prices, which the EIA projects will average about $9.21/Mcf this winter compared to $6.56/Mcf a year ago. This 40% price increase, combined with expected growth in heating demand, means household gas bills are very likely to go up by about 50% this winter, it said.

"We expect that high and volatile gas prices will prevail until [there's] solid evidence that the gas supply situation is easing," the EIA noted. But the agency doesn't expect that to occur any time soon.

November "ended with lower-than-anticipated gas storage levels, increasing the probability that the heating season will end with record-lower levels of natural gas in storage," the EIA said.

As for replenishing gas stocks, it estimates domestic gas production will rise by a paltry 0.7% to 18.79 Tcf this year from 18.66 Tcf in 1999. But the agency anticipates a significant boost to production (3.9%) in 2001, rising to 19.53 Tcf.

And while it expects net imports (mostly from Canada) to rise 7.3% over last winter, the EIA has doubts about whether the new Alliance Pipeline will be a major contributor of additional gas supply to the United States. "Even if Alliance is near capacity at mid-winter, it is highly likely that a substantial portion of the volumes contracted for delivery on the system will have been decontracted from other systems, particularly the TransCanada Pipeline system. Thus, it is an important question just how significant Alliance will be with respect to net new supply from Canada."

While gas stocks are continually being squeezed, gas demand is expected to rise by 5.9% this winter, according to the EIA. It projects overall gas demand will increase 3.7% to 22.36 Tcf for 2000, and 3.8% to 23.38 Tcf in 2001. The latter figure is based on "high weather-related demand in the first quarter and continued growth in demand for gas by the power-generating sector as new gas-fired plants come on line."

For 2000, gas demand by industrial power generation is likely to be up 18.6% over last year, but will grow at a "somewhat slower pace" of 11% next year, the EIA said. Demand by utility generators will remain about level with consumption rates this year, and is expected to remain flat in 2001, the agency noted. The lower growth will be partly owing to a "reversal in prices of natural gas relative to oil and a slowing in the growth rate of electricity demand."

While overall electricity demand rose 3.2% to 3,592 billion kWh during 2000, the EIA anticipates that growth will slow by half to 1.6% next year, with demand estimated at 3,648 billion kWh.

During the past year, utility generation used natural gas to generate 287.8 billion kWh, down from 296.4 billion kWh in 1999. At the same time, demand by industrial power generation produced 313.3 billion kWh using gas, up substantially from 287.5 billion kWh in 1999.

Susan Parker

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