Heading into the winter tof 2010-2011 he natural gas market is in “good shape,” with production at “levels not seen in more than 35 years,” according to a FERC analyst — and with moderate prices and storage already 90% full.
“January  gas prices on the futures market are around $4.13/MMBtu, only 76 cents above current spot prices, suggesting that financial markets see relatively low risk for high and volatile gas prices this winter,” said Chris Ellsworth, an energy industry analyst in the Federal Energy Regulatory Commission (FERC) Office of Enforcement. “This time last year, the January futures price was $2.43/MMBtu higher than the spot gas prices.”
“Low gas prices are largely the result of the influx of new, low-cost shale gas, which has revolutionized the natural gas industry,” he said in presenting the “Winter 2010-11 Energy Market Assessment” to the Commission at last Thursday’s open meeting.
In keeping with the trend over the past two years, prices for natural gas in the Northeast continue to grow closer to those at Henry Hub, he said. On Oct. 1, New York prices were only $2.03/MMBtu higher than prices at the Henry Hub for January 2011. This is a substantial decline from comparable price differences of $4.03 in 2010 and $5.51 in 2009, Ellsworth noted.
The decline in the basis is not limited to the Northeast. “Development of new gas supplies and infrastructure has helped push basis lower nationwide. Compared to the same period last year, winter basis swaps have declined by 46% at Chicago, by 55% in the Pacific Northwest and by 32% in Appalachia,” the FERC report said.
Ellsworth indicated that there appeared to be less demand for gas on long-haul pipelines from the Gulf of Mexico due to the growing development in the Marcellus Shale. And it is seeing the development of new pricing points due to shale development in the Barnett, Woodford and other shale plays, and some reduction in flows from the Henry Hub.
Natural gas production has grown 23% in the past five years to more than 59 Bcf/d from 48 Bcf/d in 2005. Most of the growth has come from shale gas, which now accounts for 20% of domestic gas production, the assessment said.
Shale is “truly the quiet revolution” that has transformed the industry, FERC Chairman Joe Wellinghoff said. “What a happy position to be in to be worried about too much gas.”
“Shale gas development has turned the economics of drilling for gas on its head. The cost of developing shale gas has declined and well productivity has increased as drillers gained experience with the new technology,” the FERC report said. In some markets the time needed to drill a shale gas well has plunged to days from just weeks. This has driven down break-even costs for most gas shales to less than $4/MMBtu, and even lower where natural gas liquids such as propane, ethane and butane are present, according to the assessment.
“There is a possibility that the need to find a ready market for natural gas liquids could slow down shale gas development in some areas. Possible regulations in response to concerns about the impact of fracking fluids on the environment could affect future drilling plans” as well, it said.
Commissioner John Norris wasn’t as euphoric as the rest about shale gas being the answer to most problems. While many see shale gas as a “solution for everything,” he said he had some reservations, particularly in an industry that values diversity of supply.
Looking to the Gulf of Mexico, FERC estimated that production has dropped to 7 Bcf/d from more than 11 Bcf/d in 2006. It added that it has seen little impact at this point from the federal government’s moratorium on deepwater drilling.
The geographical shift in gas production is changing the utilization of the nation’s pipeline infrastructure. “This is apparent in the Northeast, where imports of Canadian gas have dropped by 50% since last October to less than 1 Bcf/d. Western Canadian gas is being replaced by cheaper sources, including 1.7 Bcf/d via the new Rockies Express Pipeline, and Northeast production led by growth in [the] Marcellus Shale. Marcellus Shale gas production has doubled in the past 12 months to around 700 MMcf/d. [Some independent analysts are saying Marcellus production already has gone over 1 Bcf/d.] Together Marcellus production and Rockies supplies are beginning to compete successfully against traditional Gulf Coast supply.”
FERC Commissioners indicated that they would take this factor — the changing utilization of pipelines — into consideration when reviewing applications for new pipelines.
While less Canadian gas is flowing to the Northeast, the report said Canadian gas has maintained market share in the West and helped, along with mild weather, to moderate gas prices in California and the Pacific Northwest this summer. However the Canadian gas share of the California-Pacific Northwest market is likely to shrink next spring when the 1.5 Bcf/d Ruby Pipeline becomes operational.
The demand for North American liquefied natural gas (LNG) imports is expected drop this winter, according to FERC. “After peaking at a record 5 Bcf/d last January, gas supply from eight U.S., one Canadian and one Mexican LNG terminals has dropped to less than 1 Bcf/d” due largely to the growth in domestic shale and the increase in global demand for LNG.
As the market heads into winter, gas inventories should end up close to last year’s record level of 3.8 Tcf, FERC said.
To provide access to the growing shale gas, the report said a considerable amount of new pipeline capacity has been added in the Northeast. Since spring, 503 MMcf/d of pipe capacity has been completed on top of the 5.6 Bcf/d added in 2008 and 2009, the agency said. By January, it expects an additional 725 MMcf/d of new pipeline and expansion capacity to be completed, resulting in a total of 1.2 Bcf/d of new capacity added in the Northeast since last winter.
Since the start of spring, FERC said there has been 345 MMcf/d of new pipeline capacity added in the West and 2.5 Bcf/d of capacity added in the Gulf and Southeast. “We expect another 3.5 Bcf/d in the West and 5.3 in the Gulf and Southeast to be added before the end of winter.”
FERC said it expects TransCanada’s Bison Pipeline, which will flow Rockies gas to the Midwest through an interconnection with Northern Border Pipeline, to be in service in mid-November.
The FERC staff sees a 13-27% drop in forward electricity prices this winter due mostly to the lower forward prices for natural gas. “Another contributing factor is the expectation of continued moderate levels of electricity consumption.” The Energy Information Administration estimated that electricity sales to retail customers rose by only 3.9% for the first six months of the year due to warm weather.
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