U.S. Northeast gas demand would increase by 4.4 Bcf/d ifproposed environmental regulations are implemented as planned andnuclear capacity is retired, according to a recent study by WEFAtitled Northeast Gas Markets: Opportunities and Risks. The studyevaluates the Northeast gas market under a number of scenarios. Itinvestigates the impact of environmental regulations, nuclearretirements, electricity demand growth, and pipeline capacityadditions on prices and gas demand in the U.S. Northeast.

If fully implemented, environmental standards will force theclosure of 8 GW of generating capacity in the U.S. Northeast and 80GW nationally, according to Ron Denhardt, vice president of WEFAEnergy Services. Close behind new NOx standards will be drasticreductions in emissions of particulates. If implemented onschedule, the effect of these regulations on the natural gasindustry will be staggering, WEFA says. WEFA predicts:

“Many people implicitly assume that long-term firm pipelinecapacity is the same product as discretionary spot purchases ofgas,” Denhardt said. It would be foolish to sign up for firmpipeline capacity if that were true, Denhardt said. Recent averagebasis differentials probably would not justify pipelineconstruction anywhere in North America. Pipeline capacity has valuebecause it facilitates arbitrage of basis volatility, allows marketsegmentation, and provides assurance that natural gas distributioncompanies can serve customers even with severe winter weather.Consequently, spot prices do not need to rise to a level equal tothe cost of the pipeline to merit the construction of new pipelinecapacity, WEFA says.

The fact that spot basis differentials will be less thanpipeline tariffs has significant implications for how end-usersshould purchase natural gas and transportation capacity, the studysays. If a buyer cannot take advantage of arbitrage, marketsegmentation, and other factors that provide value, they probablyshould not contract directly for firm capacity. And those who canafford the risk of non-delivery and price volatility should notpurchase firm capacity.

For more information on the study, call Peter McNabb, WEFA vicepresident of energy marketing, (416)513-0061, Ext. 227.

Denhardt said WEFA will have another report out in a couple ofmonths that will address the implications of EPA plans to regulateparticulate emissions more stringently. Planned cuts in particulateemissions are supposed to be implemented by 2008 that would reducethe acceptable limit from 10 microns to 2.5 microns. “It wouldclose down a huge number of coal plants, basically all the oldones,” Denhardt said.

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