Riding a temporary price break in the Rockies, Oregon expects natural gas prices to remain stable for the year, according to reports from the major gas industry players in the Northwest. They gave projections to the Oregon Public Utility Commission (PUC) at a workshop last week in Salem, OR.

Supplies are adequate in the near term, but longer term a Northwest Gas Association representative expressed some concerns beginning in 2010-11. Demand for natural gas in the Pacific Northwest will remain flat, trending slightly downward from the 2000-2001 wholesale energy market meltdown, but volatility will continue to be an issue for some utilities and their largest customers, according to the association’s preliminary 2007 gas demand outlook.

Dan Kirschner, the association’s executive director, made the presentation to the three PUC commissioners and their staff.

A PUC spokesperson called the overall workshop “a ray of encouraging news,” coming on the heels of three consecutive years of higher natural gas rates in a state whose overall gas demand has been declining slightly each year since the 2000-2001 western wholesale energy market meltdown, as many major industrial customers went out of business.

“A lot of good things have happened,” according to PUC gas analyst Ken Zimmerman. “Prices are in a lull due to a drop in demand and adequate supply. Overall for prices, it has been a pretty dull year with not a lot of volatility. Fortunately, dull is good news for customers after three consecutive years of rate hikes here in Oregon.”

By comparison, he said last year’s rates increased for the three major investor-owned gas utilities: Cascade Natural Gas (7.9%), Avista Utilities (7.1%) and Northwest Natural Gas (3.5%). Like last year, what the PUC staff called “wild cards” will include the hurricane season and any major interruptions of supplies from the Gulf of Mexico, and unforeseen interstate natural gas pipeline disruptions.

The three gas utilities operating in the state will file in late August with the PUC for their annual purchased gas adjustment, allowing them to adjust rates up or down to cover the actual costs of natural gas supplies for the preceding period. Any changes are effective Nov. 1.

For peak demand, Kirschner cautioned that there is “not much head room” between the capacity available and the expected peak-day total demand for the four-state region as a whole. “It isn’t cause for concern, but it is one of those flags that causes our members [major regional pipelines and local distribution utilities] to plan on how they will meet their individual peak loads going forward,” Kirschner said.

Overall, the region is “staying the course,” with continued moderate growth in gas demand and ever-increasing growth in gas for electric generation, as the Northwest saw last year, Kirschner said.

Noting that the increased dependence on gas in the region continues, Kirschner said total electricity and natural gas consumption are about equal. “There is a growing reliance on gas for electric generation in this region, and we see that continuing,” said Kirschner, noting there is a “little bit of increased volatility” in the use of gas for power generation.

Randy Friedman, Northwest Natural’s head of gas buying, noted disconnects between Alberta and Rockies prices and also between New York Mercantile Exchange (Nymex) prices and the Rockies, and for the latter the amount of the spread is significantly greater than usual.

“I usually see Alberta [prices] as being representative of ultimately what’s available in the Rockies and British Columbia,” Friedman said. “Interesting to me is the disconnect between Alberta and the Rockies. That is why I never used to bother showing Rockies or British Columbia prices specifically because they tended to be very similar.

“However, this last six months, pent-up supplies in the Rockies that can’t get to market because they are waiting [for the next phase] of Rockies Express pipeline to be built and lack of liquidity have pushed down prices, so monthly spot prices right now generally are very low,” he said. “What we’re seeing right now is the difference between Nymex and Rockies prices of $3 to $4, so you take a Nymex price and subtract $3 to $4, and that is what the Rockies price is. Ten or 15 years ago the difference was 30 cents.”

However, Friedman noted that when considering longer-term Nymex prices out to mid-year 2008, when the next phase of Rockies Express should be operating, the difference “shrinks back down to about a buck.” While Rockies prices will go up, it should mean that with more supplies available going East, Nymex will go down, he said, and Oregon’s prices from Alberta should help offset the increase in Rockies prices, too.

Since 2000, the region has continued to see a decrease in the volumes of gas used for industrial operations, attributable to the crisis and the corresponding drop off of gas used for aluminum plants, many of which went out of business or greatly decreased their operations. The void has been filled by the electric generators, but with quite a bit of volatility during the past seven years, he said.

Industrial use accounted for 45% of the region’s gas use prior to 2000; currently it represents 25% of the Northwest natural gas consumption, Kirschner said, and it isn’t expected to rise in the industrial sector until the 2011-12 time frame.

“Each year since 2000 the industrial sector has seen some erosion in gas use — minimal — and it has been essentially flat since it took the big drop,” he said. Besides the big aluminum smelters going off-line, a lot of industrial energy efficiency measures came into play after 2000. Basically, we have seen no growth in the industrial sector.”

Kirschner stressed for the Oregon regulators that the Northwest is interconnected to the greater western North American natural gas pipeline grid, and as such, major new infrastructure or supplies from the Rockies, Alaska or liquefied natural gas (LNG) imports — whether or not they come directly to the region — affect the Northwest supplies. A West Coast LNG terminal anywhere should help the Pacific Northwest, although one in Oregon would be the best solution for the region, he said.

Any supplies from Alaska or the western Canada frontier can not be counted on in the region for the next 10 years, Kirschner said.

“The marginal supply source [for price] today is LNG,” he said. “Wherever LNG lands in North America, we’ll benefit here in the region, but studies validate that the closer the receipt point is to our area the more direct benefits we would receive. The market ultimately will determine which and how many LNG terminals [of five proposed for Oregon] will eventually get built.”

The Northwest Gas Association, headquartered in the Portland suburb of Lake Oswego, includes nine members: Avista Corp., Cascade Natural Gas Corp., Duke Energy Gas Transmission, Intermountain Gas Co., Northwest Natural Gas Co., TransCanada GTN System, Puget Sound Energy, Terasen Gas, and Williams Northwest Pipeline Co.

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