U.S. wellhead deliverability slide may spike gas
prices in late 1999
The continuing decline in U.S. natural gas well head deliverability
may be setting the stage for a sharp spike in natural gas prices
later this year.
While this trend of declining deliverability has been underway
for some time, its impact on gas markets has been somewhat masked
by recent lags in the rate of growth in U.S. gas demand - in turn
largely the result of aberrant weather patterns.
But the arrival of a hotter-than-normal summer and the forecast
return of normal (or colder-than-normal) winter weather have stripped
the mask away from the U.S. deliver ability dilemma.
Many industry observers are moving toward a consensus that the
convergence of usual market factors - cooling load, storage injection
levels, Canadian pipeline export capacity, etc. - are coupling with
the fundamental problem of falling wellhead deliver ability in the
U.S. to firm up gas prices. While analysts offer a range of insights
regarding a potential spike in natural gas prices, the extent of
that price effect remains open to debate.
Regardless of the debate over the scope of the price spike, analysts
seem to concur on a few observations. First, there is a consensus
that such a spike in gas prices will likely happen some time during
the upcoming winter heating season. Similarly, most analysts agree
that a spike, however great, would depend on several other fundamental
components. These include: gas storage inventory levels (both preceding
and following the winter season); declines seen in U.S. gas deliverability
curves, specifically, wellhead deliver ability in the Gulf of Mexico;
availability of imports from Canada; overall sensitivities of gas
supply to outside fundamentals; the weather in late 1999 and early
2000; and the construction of new pipelines.
Finally, there remains the question of whether the recent uptick
in oil and gas prices has generated enough cash flow to spur a rebound
in gas drilling significant enough to dent the U.S. wellhead deliverability
dilemma in the near term. It is too soon to tell on that score,
but recent studies point to declining deliverability in the U.S.
gas sector being a long-term, fundamental problem. So the 1999 winter
heating season might well set a pattern for some years to come,
with gas prices reined only by market factors other than wellhead
deliverability.
Recent market events
So far this summer in the U.S., higher-than-normal temperatures
have put a substantial strain on gas supplies. Gas consumption for
power generation plants meeting peak cooling loads continues to
be a large contributor to the industry's inability to build storage
levels to the level required for the upcoming heating season. Increased
need for electrical power thus is undercutting gas storage injection
levels.
During the week ended Aug. 13, the American Gas Association reported
natural gas net injections of only 51 bcf compared with 76 bcf a
year ago. As a result, natural gas storage levels are now 142 bcf
below last years level. According to investment firm Raymond James
& Associates, St. Petersburg, Fla., this fact is significant
because it shows that the unusually hot weather has had a notable
impact on gas storage levels.
"Lower levels of storage, combined with decreasing U.S. natural
gas production rates, give us increased confidence that we will
see a very strong natural gas pricing environment over the next
year," the firm said.
Actually, gas markets are already seeing pretty robust prices,
especially on the heels of a long heat wave across most of the U.S.
Upcoming heating season
During the upcoming heating season, say some analysts, increased
gas demand will likely exceed supply. And, even if the U.S. does
reach the start of the heating season (Nov. 1) with storage levels
exceeding those seen during the past several years, the country
could still experience some of the historically lowest storage levels
by winter's end.
In a report released early in the second quarter this year - when
natural gas prices had not yet reached the more-robust $2.50 and
above range - Raymond James cited expectations that spot gas shortages
would occur during the upcoming winter season. When and if this
occurs, explains the firm the result will be a sharp spike in spot
gas prices - even as high as $10/Mcf - rather than a slow, gradual
rise in price.
"...This kind of supply shock," said Raymond James, "would likely
awaken the natural gas markets to the true underlying natural gas
supply and demand fundamentals. Such an awakening should drive average
2000 natural gas prices well above levels we have seen in the past...
We believe that, once the U.S. gas markets receive their wake-up
call this winter, average gas prices above $3/Mcf in 2000 are very
realistic."
The analyst bases its 2000 price forecast on these assumptions:
- A steepening of wellhead deliver ability decline curves, with
U.S. wellhead gas supplies expected to decrease 2%, on a year-to-year
basis.
- A decline in drilling activity.
- An increase in Canadian supplies to U.S. of only 5%, on
a year-to-year basis.
- An expectation for a "more-normal" winter, which would drive
up demand by more than 8%, on a year-to-year basis.
Raymond James added, "...History has proven that there is a decent
correlation between the amount of gas in storage at the end of winter
(March 31) and the natural gas spot price high during that winter.
In other words, the lower the gas storage (inventory number) at
the end of the winter, the higher the probability of exceptionally
high prices during the winter."
In fact, according to its base case, Raymond James anticipates
storage levels in March 2000 will slide below 300 bcf - the lowest
level seen to date. And, because storage has never been drawn down
to these levels, the firm expects spot shortages to result. Even
if the winter season ends with a level below 700 bcf, says the firm,
the potential exists for spot prices to reach into the double digits.
A similar winter's end storage scenario - albeit a more conservative
one - is envisioned by research firm Simmons & Co. International,
Houston. The firm's base case predictions, released at about the
same time as Raymond James' study, shows a peak storage level of
2.8 tcf at the end of the third quarter. Ending the third quarter
with a storage inventory level below 3 tcf, says the firm, would
place upward pressure on prices. By the close of first quarter 2000,
the firm expects storage to bottom at 1.04 tcf.
Also affecting gas prices, the increasing number of cooling degree
days (CDDs) - the average temperature deviation from 650F for a
period of 24 hr - this year compared with last year has had dramatic
effect on injections into storage. In the week ended July 24, for
instance, the National Oceanic and Atmospheric Administration noted
that the U.S. had experienced 13 more CDDs compared with last year,
98 vs. 85.
Supply, deliverability issues
U.S. natural gas wellhead deliverability has declined by almost
1.5 bcfd, or about 3%, compared with a year ago, said investment
firm PaineWebber Inc. in a report released earlier this month. The
firm said, 'This (decline) has been somewhat offset by greater nuclear
and hydropower supplies, higher Canadian imports, and depressed
demand by the chemical industry. Nonetheless, natural gas storage
injections have failed to approach levels witnessed last year during
this period..."
In fact, PaineWebber's analysis concludes that deliverability
could be down by as much as 2.5 bcfd, or 5%, by the start of the
approaching winter season. And, says the firm, this decline is expected
to continue, even with the recent increase in upstream capital spending:
"Therefore, even though storage levels are only slightly below last
year at this juncture, the push to fill storage before the start
of this winter should keep the 'heat' on natural gas prices. Of
course, (the weather) will continue to be a key factor affecting
the natural gas price dynamics near- term," said PaineWebber.
The potential for a sharp increase in gas prices should the U.S.
experience a cold winter reflects the view that the gas markets
of recent years have been aberrations.
"Our view of natural gas prices," said Charles Davidson, CEO of
Wes ford Management LLC, Greenwich, Conn., "reflects the experience
of the past few years and the way in which the product is currently
delivered. We've had several U.S. winters in a row of unprecedented
warmth, That has masked what we believe is an imbalance between
supply and normalized demand.
"A cold winter this year could show demand that can't be met.
Only so much gas can be produced, there are only so many pipelines
with only so much capacity, and only certain places that those pipelines
go."
Gulf of Mexico development
As one remedy to declining U.S. gas deliverability, production
from the Gulf of Mexico Outer Continental Shelf remains very promising,
assures the U.S. Energy Information Administration. And, the number
of deepwater projects approaching the development phase adds to
this optimism. Overall production from the gulf is expected to reach
10-20 bcfd by 2002.
"The gas production trends to date indicate that the bulk of production
in the offshore will flow from shallowwater fields. Thus, if shallowwater
fields do not maintain their level of production, the offshore Gulf
of Mexico total likely will decline as reductions in the much larger
shallowwater production rates would more than offset anticipated
new deepwater gas production," said EIA. Increased production from
the gulf, therefore, would rely on both shallow and deepwater finds.
However, the high case of EIA's production outlook would call
added production of 20 bcfd by 2002 from the gulf.
Pipeline expansions
Ultimately, the deliverability of gas in the U.S., or lack thereof,
will have a direct effect on price in the short to medium term.
Meeting the longterm projected demand growth over the next decade
will take tremendous investment and significant pipeline expansions,
says EIA.
"Interstate pipeline capacity has increased by more than 16% (on
an inter-regional basis) during the past decade. Average daily use
of the network was 72% in 1997, compared with 68% in 1990.
"More than 17 new interstate pipelines were constructed, as well
as numerous expansion projects, between 1990 and the end of 1998,"
said EIA. "In 1998, at least 47 projects were completed, adding
about 10 bcfd of overall capacity to the national grid."
Proposed in the Lower 48 for 1999 and 2000 are more than 75 pipeline
projects, which would add about 20.1 bcfd of capacity to the national
grid. Over the course of the next 2 years, says EIA, as much as
$10 billion could be spent on natural gas pipeline expansions, based
on initial estimates...
-- Steven Poruban
Source Oil & Gas Journal, August 30, 1999
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