There will be ample natural gas to meet the needs of power generators this summer and to inject into storage for next winter due to the growing number of industrial customers exiting the gas market as a result of escalating prices, said trading executives last week.
Tony Rodriquez of Dynegy Marketing and Trade and Brian Redd of PanCanadian Energy Services estimated that between 3 Bcf and 6 Bcf of gross demand by industrial customers — aluminum smelters, ammonia producers and fertilizer producers, for example — has exited the gas market, and they don’t expect it to return for quite awhile. Industrials either have shut down their facilities or have switched to alternative fuels due to abnormally high gas prices, leaving more gas for power generators and storage. The two executives referred to this phenomenon as “demand destruction.”
Overall gas demand has risen 16% during the past four years, but “we’re beginning to see [the emergence of] demand destruction” where industrials are involved, said Rodriguez, Dynegy’s vice president of gas trading, during NGI’s GasMart/Power 2001 in Tampa Thursday. “They just have gone. I don’t envision them coming back any time soon.”
Redd, PanCanadian’s vice president of energy trading and marketing, called the rate of demand destruction “significant,” estimating that it was in the range of 3-4 Bcf/d. Rodriguez attributed demand destruction to a number of factors, including high gas prices, the increasing jobless rate and productivity declines. “These are indicators that destruction in demand is for real here.”
Given the amount of demand destruction, “we feel that right now there’s enough gas to feed the generators and stock up for winter,” said Rodriquez. “I think we can be at 2.9-3 Tcf by the end of the injection season, which will make it a lot more comfortable to meet the winter demand.” He sees spot gas prices averaging $3.50-$5.50/Mcf over the next 12 months.
The American Gas Association’s storage figures released last Wednesday “tell me that we’re quickly reducing the deficit. We’re down to 159 Bcf [below last year’s storage level]. By the end of May, we’ll probably be flat to last year. At the end of January, we were at 30% below…We’re only 14% [below] this week. We’ll be down flat by the end of the year,” Rodriguez told the gathering of gas and power executives.
The fact that industry has been quickly narrowing the gap between last year’s and this year’s storage levels suggests “continued substantial curtailment of demand” for gas by industrials, Redd said. If “the current trends continue, we may be able to make up the complete [storage] deficit by the end of May,” he agreed.
Rodriquez estimated that industry will have to inject about 74.7 Bcf a week, up from 63 Bcf/week last year, over the next 26 weeks to reach a 2.9 Tcf storage level by next winter. That’s about an additional 1.67 Bcf/d of gas that will need to be placed into storage. “I think that’s very doable right now under current conditions. The only thing that we have to consider is obviously hurricanes that can create tremendous disruption” and other weather conditions, as well price fluctuations for crude oil.
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