NGI The Weekly Gas Market Report
U.S. natural gas demand is expected to rise by 1.3 Bcf/d and reach a new decade high this year, driven by normal weather and a combination of environmental and structural factors, which in turn will place a bigger burden on domestic output and imports, according to Credit Suisse.
For 2007, Credit Suisse energy analysts estimated that the “tail events” in weather allowed average daily demand to recover to 57.6 Bcf/d from 54.6 Bcf/d in 2006. In 2008, they expect demand to increase to 58.6 Bcf/d.
And because of a decline in industrial market share, “weather will play a much more important role in determining demand,” wrote Credit Suisse Director Teri Viswanath.
If, as expected, there is a return to near-normal temperatures, air conditioning load and space heating demand for gas would rise, the analyst said. Other factors that could contribute to this year’s growth include:
Ten years ago, said the analyst, the outlook for U.S. gas consumption was “amazingly upbeat,” and it was impossible not to get caught up in the “euphoria of merchant development” in 1998. Viswanath looked at the data and concluded that a combination of environmental and structural factors will drive consumer demand for gas higher his year, but the analyst cautioned that “it is somewhat questionable whether the U.S. can afford this growth; the increase in demand will place a heavier burden on domestic production and imports to balance the market.”
In Viswanath’s view, the “house that Enron built” allowed large-scale development of gas-fired generation in the past 10 years to place an unreasonable strain on the U.S. gas system. A decade ago, “there was not a lot of thought given to the supply specifics on how the new growth in gas demand would be met. It was the merchant revolution age and there existed a supremely confident feeling that we could put all of the planned LNG [liquefied natural gas] terminals in the U.S. to work in tapping into sufficient global natural gas reserves.
“After all, during the better part of the 1990s, the four existing U.S. terminals, built between during the 1970s and 1980s, were mostly left idle because low domestic gas prices made imports uneconomic.”
The changes today “seem nothing short of extraordinary,” Viswanath wrote. “The ability to meet demand with domestic production has significantly eroded over the last several decades. The chain reaction that was set off in the 1990s coalesced in tighter supply/demand balances and led to a steep increase in the price of natural gas.”
In turn, higher gas prices reduced industrial load and restricted growth outside the residential sector, Viswanath said. “In the end, we simply couldn’t afford the natural gas growth envisioned in the 1990s.”
Most of the gas-fired power plants proposed in the 1990s were built, a development which led to a “significant” increase in gas demand from the electric power sector. “Unfortunately, this unfettered demand growth appears to have come at the expense of other consumptive sectors.”
Total consumer demand for gas has remained roughly flat over the past 10 years, but electric power’s market share has grown by 10%, which is about the amount given up by the industrial sector, according to Credit Suisse research. Now, said Viswanath, total demand is “much more weather sensitive and therefore more volatile. Changes in seasonal temperatures will cause larger variations in total demand.”
Another trend seen by Credit Suisse is lower growth in core local distribution company demand, both residential and commercial. “Natural gas utilities have taken note of a rather alarming trend with their residential customers. Rising prices have made it harder for residential consumers to pay their heating bills and have resulted in conservation and/or nonpayment to local distribution companies.”
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