The gas market actually did pretty well last year considering itwas the warmest year on record, but it may take an ice age toreduce the surplus storage gas bequeathed to 1999. Spotdelivered-to-pipeline gas prices in the U.S. averaged $2.02/MMBtuin 1998, down 41 cents, or 17%, from 1997. Some points fared betterthan others and the West generally did better than the East. Canadaactually came out ahead.

But prices fell sharply at most major market and supply pointsin North America. Henry Hub prices collapsed 49 cents to average$2.10 for the year. Midcontinent field prices on Panhandle Easterndropped 44 cents to average $2.01. New York citygate pricesplummeted 62 cents to $2.43, and Chicago citygate prices tumbled 56cents to $2.19.

“I’ve heard last year was the warmest in 700 years. That wouldtend to depress prices,” quipped Ronald Barone, energy analyst atPaineWebber. Barone also mentioned other factors, including theimpact on industrial demand of the strike at General Motors and thelosing battle with competing fuel prices because of the depressedcrude oil market.

“Inventories are at the highest levels in 10 years for most ofour commodities, oil, liquids and gas, and it’s because of the warmweather last year and the exceptional storage build we had lastsummer. Depending on how this winter goes, it could have a lastingeffect,” Dynegy President Stephen Bergstrom warned in an interviewwith NGI last week. “In November and December we were 15-20% warmerthan normal so all that does is compound the problem. We need tohave several weeks of sustained cold to get this storage unloaded.”One liquids trader said the other day that we need the ice age, headded.

The storage overhang and, of course, the warm weather were majorfactors depressing Henry Hub-New York City basis in 1998. “Thebasis to the Northeast got crushed because of storage. [It]normally is a little better than what we saw for most of 1998,”noted Bergstrom. “There wasn’t a lot of value for transportation tothe Northeast, but that was more storage- and demand-related thananything else. We’ve seen basis in the last week or so in the dailymarket has been running back up to 70-80 cents versus not evencovering variable costs of a nickel or so last summer.”

Several spot market locations were better able to handle theheat and the storage situation, however. For example, declines inthe Rockies were not as serious. At Opal, WY, prices fell only 20cents to $1.81 and basis with the Henry Hub actually tightened bynearly 30 cents.

“Some people would say it’s because of Pony Express [KN Energy’snew pipeline from Wyoming to Kansas City] and the WyomingInterstate and Trailblazer expansions [to Midwest-bound pipelines]that happened two years ago, but I don’t agree,” said John Harpoleof Mercator Energy in Denver. “I think it’s all weather [related].The West has had hot summers and cold, dry winters.”

One other notable change in the West was the significantwidening of San Juan-Southern California basis. While thedifference between Opal and Southern California border pricesactually decreased 9 cents, the difference between San Juan and theborder increased by 17 cents. The obvious reason: Dynegy’s controlof 1.3 Bcf/d of capacity on El Paso between the San Juan basin andthe border. Dynegy’s two year contract for the capacity startedlast January.

“Obviously [our contract with El Paso] had an impact and changedthe market dynamics in the West, and that continues because ourcontract continues,” said Bergstrom. He called it a”rationalization” of the transportation market out West and saidthings would be different if the capacity were in many hands ratherthan just one. “It doesn’t have near the impact of a storageoverhang on the industry,” Bergstrom added.

Canada on the Plus Side

Western Canada appears to have been the only safe haven lastyear from the general price depression. Aeco-C prices actually rose3 cents to US$1.38 while Chicago prices plummeted 56 cents to $2.19from last year’s average of $2.75.

“There’s not enough gas in Canada to feed all the exportcapacity. We’ve been expecting that for some time,” said Bergstrom.He said Aeco prices were strong last year in anticipation ofexpansions by Northern Border, TransCanada and Portland Natural GasTransmission this winter. Together they represent an increase inCanadian export capacity this winter of about 1.2 Bcf/d.

“Once it gets there, it’s too late for a trader to make anymoney on the position. When things like that happen, you’ll see theforward market will tell you the answer before the physical marketgets there.” Those expansions were factored into western Canadianprices all year.

The Outlook for ’99

What is factored into prices right now is the large storagesurplus, 606 Bcf as of last week when compared with levels lastyear at this time. Most observers (see related story) believe thatwithout severe and prolonged cold over the next few weeks, pricesin 1999 may not fare much better than last year.

What apparently is not factored into prices yet is the huge cutin E&ampP spending by the major producers and many of the largeindependents.

“As a result of all of this, there has been a severely depresseddrilling budget in the last half of 1998 and in 1999. It’sincredible,” said Barone. “And for every 100 decline in the rigcount, deliverability declines something like 800 MMcf/d ninemonths down the road. So we are going to see the impact ondeliverability in the last half of this year.

“I’m probably crazy. I’m still [forecasting] $2.40/MMBtu” fordelivered prices in 1999. “But I didn’t think we were going to end1998 with this much gas in storage and I thought we were going tohave normal weather conditions in November and December. We onlyhad normal weather conditions the last two weeks of December. My$2.40 could be high but I think we could be looking at some prettyhealthy gains. I’m not cutting my $2.40 yet. I think it’s stilldoable.”

The 12-month strip of gas futures prices on the New YorkMercantile Exchange fell below $2 last Thursday. It was $1.92 whenthe January contract expired Dec. 29.

Rocco Canonica

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