But stability should be long term, and volatility will be confined to relatively short-lived bursts.
Wholesale natural gas prices in the Pacific Northwest will remain unchanged or slightly lower this winter, a panel of industry representatives told the Oregon Public Utility Commission (PUC) Tuesday during the PUC’s annual Gas Price Outlook meeting in the state capital at Salem, OR. But at least one utility representative predicted that volatility would creep in for short periods of price spikes.
While average prices spread over a year or multi-year periods will remain stable, during shorter periods wholesale natural gas prices are expected to continue to have wide swings, according to the head of gas supply operations at Portland, OR-based Northwest Natural Gas, Randy Friedman.
For a given year or years the prices are expected to stay in a range of $4-6 or $5-7, but in shorter bursts “you’re going to have plenty of volatility,” Friedman told the three-member PUC. “For example, this year is predicted to be an all-time hurricane season — again [such as 2005] — and while it probably won’t happen that still tends to influence price expectations for the next few months until reality matches up with the hype,” he said.
In addition to prices staying stable, the Northwest Gas Association (NWGA) and Oregon’s three major investor-owned gas utilities underscored the fact that gas supply/demand in the region looks a lot different than it did just two years ago, when prices were hovering near $14 and concerns about being able to meet future peak demand were growing. At that time the rationale for importing liquefied natural gas (LNG) into one of three proposed receipt terminals was stronger, according to NWGA Executive Director Dan Kirschner.
Prices for this coming winter were pegged in the $5/MMBtu area, according to an Oregon PUC staff analysis, compared with $4.90 last winter. Annual comparisons put the 2010-11 prices at $4.80, compared with $4.24 for the 2009-10 period.
Among a host of issues driving gas prices and availability, the two most significant factors this year are the continuing decline in industrial gas demand and the fact that the nation is awash in shale gas. “Shale’s impact is indirect in the Pacific Northwest because we don’t have any production here in the state or region, but there is lots of shale production both in Canada and the Rockies,” said Ken Zimmerman, the PUC’s natural gas analyst. “To the extent that shale influences the volumes coming out of the Rockies, it obviously impacts us.”
In today’s market the only real clear driver for growth in gas demand comes from the electric generation sector. “We expect this comes from increased use of the existing fleet of gas-fired generation plants — both as a baseload and potential integration resource,” NWGA’s Kirschner said.
“At this point in time, however, it is really hard to say [what future generation sector demand will be]. I am not sure we are able to fully capture the impact, or potential impact, of gas use as a generation fuel. We’re working with various organizations and companies trying to increase dialogue and get a better understanding.”
Kirschner noted that the decline in demand overall, coupled with a “surge” in supply, has changed the list of infrastructure projects in the region with at least one Rockies pipeline proposal (Sunstone) and an LNG terminal (Bradwood Landing) being shelved. “Sunstone pipeline is on indefinite suspension and is not going anywhere right now,” said Kirschner, noting that El Paso’s Ruby Pipeline is expected to be operable next year, but with only indirect impact on the Northwest.
“The market continues to work in this regard, and proposals that weren’t needed have fallen off. In regard to a question from the [Oregon PUC] chairman [Ray Baum] wondering about the impact of shale on LNG, in my estimation the rationale for the LNG projects has changed,” Kirschner said. “Two forces were originally driving the proposals in the Northwest — global supply excesses and constraints in our domestic gas supplies.
“We looked like a good place to land all of that gas because North America was going to be pretty tight, but we all know now, two or three years later, that North America looks pretty flush in gas. That doesn’t remove the global supply rationale and LNG producers will still need more places for their supplies to land.”
Friedman said there are a number of offsetting factors. He said shale gas, assuming the environmental concerns can be managed, will tend to keep down gas prices, but nevertheless he sees a number of offsetting factors that can cause significant price spikes from time to time.
Another example is the emergence of shale as a major factor in projecting future Western Canada supplies that will be available for export, he said. Just a few years ago, with no consideration for the shale potential, Northwest utilities were preparing for a downturn in Canadian supplies and increased reliance on the U.S. Rockies, Friedman said. Now all that has changed.
And if the proposed Kitimat liquefied natural gas (LNG) export project for some of the shale gas supplies becomes a reality, that might cause a two-track pricing system for British Columbia (BC) wholesale gas supplies, Friedman said. “If Kitimat goes, now you are changing the price dynamic in BC because that export gas is not going to go for the $3 or $4 that was based on a North American [pricing] hub; it will instead be based on crude [pricing scheme] paid in Japan for LNG. So we could end up with a dichotomy in which one group of supplies is going for $7 and another grouping going for $4.
“This is just one of the factors that we will be talking about for the next couple of years to see how it plays out and what direction it is going to go,” he said.
In looking ahead, Friedman said the price of wholesale gas supplies is not expected to follow oil as closely as it had been. The price of each fuel is expected to follow its own direction next year as the surplus of North American gas supplies grows, he said. “When supplies are tight is when we see the gas prices shoot up to $14.”
Another potential offsetting factor would be the April 20 BP Gulf of Mexico oil well blowout and resulting spill, but so far it has had no impact on gas prices, according to Friedman. Any eventual impact on gas prices from the spill would be long term, he said.
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