December 26, 2008

Power generation is likely to be the only driver for increased natural gas demand this winter as warmer weather and a sluggish economy dampen retail and industry demand, the Natural Gas Supply Association forecast in its annual winter outlook for 2008-2009.

"Gas-fired generation is an area where gas demand is expected to increase as a result of gas generating capturing most of the new power generation capacity," says Patrick Kuntz, vice president at Marathon Oil and current NGSA chairman, at a presentation of the forecast in Washington in October.

Overall demand is expected to grow 2.4 percent this winter to 78.5 billion cubic feet a day from 76.7 billion cubic feet (bcf) a day last winter, the group said. The annual addition to generating capacity is expected to reach 6.9 gigawatts, compared with 5.2 gigawatts last year. For the second year in a row, power generation will surpass industry as a consumer of natural gas, NGSA said in the forecast.

The industry group views this small increase as essentially flat, not creating any upward pressure on prices. At the same time, a solid increase in domestic production will more than compensate for any increased demand and exert a downward pressure on prices.

NGSA, which relies on government data, third-party consultants and member input to develop its forecast, expects average production this winter to increase 8 percent to 57.5 Bcf a day from 53.3 Bcf a day last winter. This comes as annual well completions rises to 31,530 from 30,777 and annual average rig count rises to 1,535 from 1,470.

"Much of the increase comes from unconventional gas plays, such as shale gas," Kuntz said. And this type of production can increase because of sophisticated techniques such as horizontal drilling and hydraulic fracturing. "Technology is the unsung hero."

NGSA doesn't forecast prices. Rather, it forecasts the type of pressure it expects the various supply-and-demand components to exert on prices and lets users draw their own conclusions.

Supply from imports will be flat, according to the forecast. Imports from Canada will decline 6 percent, to 7.5 Bcf a day from 8 Bcf a day, as supplies from Western Canada decline and Canadian demand increases. LNG imports will increase only slightly, to 1.0 Bcf a day from 0.8 Bcf a day, as the increased domestic production obviates the need to buy the much more expensive LNG.

Kuntz cautioned that this muted demand for LNG might not last. "While production from unconventional plays is only in its infancy and we are extremely encouraged by the results so far, we can't say we'll never need LNG again."

Warmer Winter

NGSA also expects weather this winter to be slightly warmer, with 3,534 heating degree days compared to 3,572 last winter. "Heating degree days" measures the daily gap between the outside temperature and the reference temperature of 65 degrees Fahrenheit. This difference in the number of heating degree days would result in a winter 1.1 percent warmer than last year and 1.5 percent warmer than the 30-year average. Last year, the weather was 0.4 percent warmer than the 30-year average.

While weather demand, then, is flat, an economy that at best will be stagnant and marked with increases in unemployment and a decline in manufacturing activity is expected to exert downward pressure on prices. Adding to market stability will be the storage situation. Storage at the end of injection season will be 3,450 Bcf, or 98 percent of average fill, down only slightly from last year's record 3,545 Bcf, a whopping 103 percent of average fill, based on a five-year average.

Although supply and demand should create flat to downward pressure on prices, Kuntz cautioned that actual prices could be higher. For instance, some of the gas that was injected into storage over the summer may have cost more than current prices and that cost will be passed on by retailers through the winter.

Natural gas prices in the lower 48 states, after declining through much of 2007, rose more than 50 percent over the summer but declined sharply at the end of the summer. "Natural gas is pretty much where we started 20 months ago," Kuntz said.

In fact, Kuntz said, domestic natural gas has been de-linked from crude oil prices and even from world LNG prices. The continuing increase in domestic production has led to this de-linkage, he said.

The natural gas industry is likely to experience some impact from the credit crunch and the ensuing economic slowdown, Kuntz said. But investment decisions in the industry tend to be long-term and would probably be affected only if there were a prolonged recession.

Natural gas is appealing now. Ultimately, however, some analysts expect natural gas prices to rise over time to levels that make alternative energy forms such as coal, wind and nuclear look attractive. These underlying market fundamentals in combination with a new president that will emphasize green energy production will likely alter the long-term outlook for all types of energy creation.

 

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by Darrell Delamaide