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EEA: High Gas Prices Here to Stay, But More Cogens Could Provide Near-Term Relief
The current gas pricing environment is not an anomaly that is soon to vanish in a sudden market collapse. It’s a supply-driven predicament that’s going to stick around for years, according to consultants at Energy and Environmental Analysis Inc. (EEA).
The best thing large gas consumers can do in the short-term, EEA said, is be more efficient by using more combined heat and power generation, traditionally called cogeneration.
EEA expects Henry Hub gas to average $5.65 this spring and summer (through October), $5.85 next winter, and $6 next year. Prices “could easily average near $6.50 in 2006.”
The key driver behind current high prices is the continued decrease in domestic natural gas production, the company said in its Monthly Gas Update. “Producers have responded to higher natural gas prices with increased drilling, as seen by recent higher rig counts [more than 1,100 active rigs]. Unfortunately the results have been disappointing. It appears that U.S. rig counts of nearly 1,200 are necessary just to maintain current production levels. A large increase in U.S. natural gas productive capacity is unlikely in the near term.”
EEA also said it sees the trend of lower Canadian exports to the United States continuing. The only thing adding to supply over the next few years will be imported liquefied natural gas (LNG) from the four existing import terminals in the United States.
EEA predicts that LNG imports will rise to 4.8 Bcf/d by the end of 2006, which is more than three times 2003 levels. “This will dampen potential price increases.” But new LNG terminal construction (probably in 2007) “will be necessary to bring gas prices back to a level below $5/MMBtu, EEA said.
Continued demand growth and extreme difficulty increasing supply even at a rapid drilling pace will lead to higher prices for quite a few years. Residential and commercial demand will grow with the economy and population. Demand from power generation will continue to rise.
“Although some additional demand reductions are possible, a collapse of industrial sector gas demand is unlikely,” EEA said. “Industrial gas consumption is already 20% below levels seen in the late 1990s. The most price sensitive industrial consumers are already gone.”
EEA said that one of the best sources of near-term relief from high gas prices could be found in using more small gas-fired cogeneration plants (combined heat and power, or CHP) on site at industrial and large commercial locations. “Widespread development of CHP would provide some ‘breathing room’ for the market as the industry develops the new sources of gas supply that are needed to forestall even higher prices for the rest of the decade,” said EEA.
In a technical look at the potential for adding CHP, EEA projected that about 14,000 MW of cogeneration (average size 1.5 MW) could be added in Texas, the Northeast and California, reducing regional gas demand by 4-9%, or a total of 530 Bcf/year.
“This is an assessment of the potential market,” said EEA President Joel Bluestein. “We didn’t do an economic analysis of specific sites. It would take some work to achieve this. We’re not suggesting it is about to happen.
“In a world where you have a very tight supply and demand balance, in the short term it is hard to create supply very quickly,” he noted. “The quickest thing you can do to address this tight supply and demand balance is to be more efficient. CHP is probably the most readily available and most widely applicable form of efficiency that we have.”
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