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A new study by EnergyBusinessWatch suggests that, after three years of unprecedented turmoil, the U.S. energy industry is about to face a new and potentially severe crisis: a sharp upward shift in natural gas prices that could permanently change the competitive positioning of many energy companies and persist for at least the next 5-7 years.
These conclusions already have been partially confirmed by the stunning events of the past few days – including an all-time record comparable-week withdrawal from storage during the first week in December and a 25% increase in the NYMEX January (i.e., “near month”) contract in a single 5 day period, to levels well above $ 5/ MMBTU.
The EBW study, to be released next week, concludes that if recent proprietary forecasts of a colder-than-normal next 30 days prove to be correct, the amount of natural gas in storage could easily drop below 800 BCf by the end of the winter heating season, with natural gas prices potentially soaring to a level between $ 6 and $ 8 /MMBTU in as little as three weeks.
Further, while natural gas prices may soften slightly during the spring, injection into storage during the ’03 injection season is likely to be at least 35 -- 40% below historical norms.
As a result, by the end of the injection season next fall, storage may still be below 2,000 BCf (i.e., on a seasonally adjusted basis, an all time low). If so, natural gas prices could remain well above $ 6/ MMBTU during much of next year and the upward pressure on natural gas prices in the winter of ‘03/’04 could be just as severe as it is likely to be this year.
Further, by April or May of next year, electricity prices could begin to increase rapidly in every region of the country in which natural gas-fired generation is the marginal source of supply – with peak prices during the summer months rising 50% or more compared to last summer even in regions in which there is substantial excess generating capacity.
Nor is this upward shift in the price curve for both electricity and natural gas likely to be short-lived. Instead, it marks the earliest stage of a transition period that may last for much of the rest of this decade in which the U.S. must shift to new, less conventional sources of supply to meet the rapidly growing demand for natural gas as a fuel to generate electricity (i.e., massive increases in imports of LNG, imports of natural gas from the Arctic Circle in Canada through the MacKenzie Delta Pipeline, massive expansive in ultra-deepwater drilling in the Gulf, etc.) but cannot bring these new sources of supply on rapidly enough to avoid a near-term short-fall in supply of up to 1.5 –2.0 TCf/year.
For some well-positioned energy companies, these price increases could provide much-needed financial relief at a time of great stress. For many others, however, and for the U.S. economy as a whole, the negative repercussions could be severe – with the potential to nip the current economic recovery in the bud, pushing the U.S. economy into a “double dip” recession in the first or second quarter of next year.
Causes and Consequences
Unlike some prior market dislocations, there is no reason to expect that this price increase will be the product of market manipulation or other illegal conduct. Instead, it results from a fundamental imbalance that has been developing throughout the course of this year between supplies available to the North American market and the level of demand that would occur if prices were to remain at or near the $ 4 /MMBTU level.
As a result of this rapidly-growing imbalance, supplies of natural gas available to the U.S. market are virtually certain to fall at least 1.5 TCf below EIA’s most recent (12/9/02) ‘03 consumption forecast of 23.11 TCf, forcing sharp price increases to drive out-of-the market at least 5-7% of expected ’03 demand.
This imbalance in turn is the direct of result of a head-on collision of two “tectonic plates” set in motion long ago:
The rapid decline, after more than three decades of development, of almost every major conventional source of natural gas supply in the U.S. and the Albertan fields in Canada.
The rapid shift, as a result of the long-delayed impact of Clean Air Act requirements enacted in the early 1990’s, to natural gas-fired generating units as the marginal source of supply to serve virtually all of the incremental electricity needs of the U.S. economy (by far the most electricity-intensive economy in the world) for many years to come.
These two drivers will be examined in greater detail in subsequent articles and in the study to be released next week.
For information on purchasing reprints of this article, contact Tim Tobeck ttobeck@energycentral.com. Copyright 2010 CyberTech, Inc.
Good article. Points a slightly more price-accelerated picture than that which we believe in, but for some similar reasons. The effects of hotter summers and drains on gas reserves for increased cooling degree days is also a factor in gas price increases during summer months, in addition to storage and supply shortfalls. Given bottlenecks in transmissions in key regions, price increases may be exaggerated in areas such as the East Coast until further Nova Scotian gas can be identified, purged and delivered to market.
12.24.02
The one important issue not addressed is teh demand situation. It is noted taht teh overall demand for gas has dropped over the past two years and it is expected that production levels should drop if the demand will be lower. While the volatility in price increases due to large variations in seasonal demand levels, the annual average price for gas in not anticipated to rise to the extent quoted by the author.
It should be noted that before prices can reach teh $6 to $8 per mcf levels, other new sources such as LNg will come in and will be economic at lower price levels thus mitigating the long-term step in prices as observed herein.
George Fleming 12.25.02
I knew Jimmy Carter was right.
Alvaro Linero 12.31.02
Good analysis. For the U.S., burning coal in convetional, or circulating fluidized beds, or supercritical units, or gasification/combined cycle will ultimately moderate this problem (after LNG does its part). The key is to sell gas short when the market goes above $6 and buy when it goes to $2 and hold on while situations correct back to $4 or so.
Guy Ausmus 12.31.02
If there's one thing that 20+ years in the energy industry has taught me, it's that energy markets are short term inelastic and long term EXTREMELY elastic. In the instance of North America's energy market, clean air laws + high energy costs will drive demand to resource rich/regulation sparse environments.
The American Petroleum Institute used to circulate a chart showing the real price of crude oil over the last 100 years. Save the 1970 Arab Oil embargo, and perhaps the 1990 Iraq War, crude been between $10 and $20 forever. Is it reasonable to think, long term, that another primary energy source can exist at prices not consonant with that?
So, there's plenty of reasons to think that the North American energy industry (particularly E&P) should do well the next 3-5 years. Permanent changes? No way.
Dwight Allen 12.31.02
An interesting article that in some respects is reminiscent of the "end of cheap oil" thesis popularized by Colin Campbell and other pessimistic geologists, i.e., the world is nearing the point at which half the reserves of conventional oil have been extracted, which is when annual world production will begin to decline, as predicted by the Hubbert Curve (the decline in U.S. oil production arguably confirms the operation of the Hubbert Curve). According to the theory,we won't be running out of oil but we will be paying more for energy, since various forms of unconventional oil and alternative fuels will be more expensive than conventional oil. Campbell and his allies argue the economic and technologial forces that have always come to the rescue when reserves seemed to be running low in the past won't save the day this time. They say a similar fate awaits natural gas. See www.oilcrisis.com and the book Hubbert's Peak by Kenneth Deffeyes
Lloyd Weaver 12.31.02
Right on. The article, when citing EIA data, could have mentioned that at present use rates that we have a meager 8-year supply of natural gas, and are poised to become they largest importer of LNG in the world. I think that is a fair statement.
The fact that we use mainly our own gas supply for domestic use tells the story about what is going to happen regarding future LNG imports (extensive off-shore LNG import facilities are currently being designed as I understand it).
Robert E. Cates 12.31.02
The author is to be congratulated on a well-thought out thesis...and, the first 6 responders are to be equally congratulated on their logical points of view, though in disagreement on the future prices of gas. A point this humble Energy Servant would like to add relates to the Electric Power industry, whereas: When, and before, DeRegulation started in California, the price of gas hovered around a average of about $2/Mbuth (that's Mega), with vascillations from about $1.60 to $2.20, and most Power planners & regulators were presuming that the price of about $2 would continue for some reasonable time to come...hence their presumption that all new suppliers who spring up in every State could compete with Natural Gas G-T's & CCGT's & beat the old Utes, at the Generation cost game, who were on coal or nuclear (with high investment costs to recover), and thereby drive prices down & make a good deal for the Consumer! But, unfortunately, the price of gas rose astronomically, due in part, if not totally to the 9/11 event and all its implications, and due to some of the Energy Companies unseemly methods of financial management & auditing. Now, what we are left with is the unlikelyhood that any pricing reductions for the Consumer are in the offing, and a score of IPO's & Utes in financial troubles, with no clear solution in sight! What a time for Ice Thermal Energy Storage, so those peaking periods are ameliorated to hold down demand during Air Conditioning weather, & wherein the local GenCos can extend their peaking capabilities with fewer Gas Turbines, enhance their efficiency during peaking periods, reduce their NOx releases, and provide District-Cooled Piped Cold Water where applicable to businesses & offices to allow elimination of old-outdated Freon Compressors, of which the revamping costs are typically greater than the new systems, and everyone save money & their credit ratings in the offing!
Sound good? Most applications save big investment costs over a few years! R.E.C. Associates, Ltd...December 31, 2002 Robert E. Cates, Consultant..... Email: recassociates@msn.com
Paolo Fornaciari 1.1.03
The last edition of the IEA report :“World Energy Outlook”, shows that, besides the war winds between USA and IRAQ, the oil demand shall increase from the actual 75 Mb/d up to 120 Mb/d in 2030. Since the majority, if not all, the West oil wells are at their maximum capability or even declining, only a very unlikely dobling of the OPEC oil production could allow to match the future world oil demand. And the price will potentially soaring to very high prices. C.J. Campbell e J.H. Laherrere, in their article : "The end of cheap oil" ( Scientific American, March 1998) dd write : “The world is not running out of oil—at least not yet. What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend. Even if the future oil price will not reach the 100 $/b envisaged by Zaky Yamani, a figure of 40 to 50 $/b seems possible. And the natural ga price will follows, probably to 8 or even more $/MBTU.
George Hay 1.1.03
California's electricity recent "crisis" illustrates the need for a "strategic system planning" within which market forces can work, and has significant implications nationally for electric and natural gas supply, as well as renewable energy systems. Market forces tend to focus on the economics of "trees" and not "forest management".
California's electric supply system design reflected large natural gas cycling steam units (almost a third of total capacity) in urban load centers to compliment regional low cost hydroelectricity that had significant variation in seasonal and annual availability.
The 20,000 MW fossil fleet was in the low 30% range on efficiency for natual gas. A research consortium of utilities that I managed looked at advantages of "modernizing the fleet" with higher efficiency more flexible gas turbine systems to replace the 30-50 year old steam units.
Improving that "fleet efficiency" to 45% would have dramatically reduce greenhouse gases (+50% reduction), NOx and fuel consortium. A 50% reduction in natural gas consumption would have had a dramatic impact on reducing gas prices on average, but would also double the amount of electric capacity that could be available on-peak. Further, more flexible gas turbine systems relative to attributes of distributed, quick start, mobile (regional asset exchanges) and other factors would also have many benefits, amongst them enhancing and accelerating the market potential of non-hydro renewable energy like wind that have limited capacity value.
At the time, as the research budgets for electric supply were largely eliminated, the perspective would be that "markets would take care of things", and the "cost" of running the "depreciated" 30-50 year old plants was so low at the margin, that the strategic "insurance value" of "efficiency" (and for that matter thinking about the future) was undervalued.
We all know the outcome of the California story, but part of it can be summarized as markets don't care or think about the long-term.
Utilization of natural gas efficiently as possible is important nationally to stretch supplies and reduce greenhouse gas, as well as thinking through the life cycle implications of "gas turbine" asset utilization which can shift back and forth between baseload to peaking, and even moved or cofired with other fossil and renewable fuels.
The importance of "objective" independent technology and system research from short-term political and business interests is also illustrated by the California experience, both to support regional electric/gas system system "planning" (is that still a dirty word?) and creating options as insurance against low probability but high impact "crisises".
George Hay CAGT Haddonfield, NJ 856-427-9793
Larry Mapes 1.1.03
Thank you to the author and the respondees about the natural gas crisis. Clearly there is not an inffinite amount of natural gas or any other fossils out there. he primary discussion seems tio center around the 1-7 year time frame. Life cycle of power plants is generally in the 30 to 40 year range. With that said, I woukld like to make comment about George Hays statement about trees and forests.
A National energy policy with an empasis on developing renewables seems to me to be responsible leadership. Renewable energy is no longer "alternative". I can install a solar hot water system on a household with a 5-7 year return on investment in many circumstances with an equipment life-cycle of 20 + years, including maintanence.
If more homeowners thought about this type of energy system, this will reduce demand for all energy sources.
Even a more basic and potentially longer lasting effect is energy efficiency in basic building techniques. Today, many houses are built without some very basic energy saving features, such as insulation under a slab. Market drives these defficiancies, as a builder wants to sell a house as quickly and cheaply as possible, while the buyer is stradled with a home that can cost much more to heat without even knowing.
Truly, we need quality leadership in the energy world that knows the difference between a tree and a forest!
Victor Bush 1.2.03
Perhaps its time to rationally rethink the nuclear generation option.
Andrew Weissman 1.2.03
Re Robert Cates' Comment: Cates is absolutely correct in pointing out that many state electric utility restructuring programs were adopted at a time when it was assumed near-universally that natural gas prices would remain well below $ 3/MMBTU.
To date, in many states that have adopted restructuring programs, higher natural gas prices have not necessarily affected end use customers' bills.
This is because many states that have adopted restructuing programs have put in place rate caps that protected customers against rate increases during the first 3-4 years after restructuring occurred.
In many states, however, these rate caps expire or begin to be phased out later this year. Once this occurs, end use customers' bills could begin to increase rapidly.
The risk exposure, for both end use customers and certain utilities, could be particularly severe in states in which the local service provider has sold some or all of its coal and/or nuclear units to an Independent Power Producer or been allowed to spin these units off to an unregulated genco.
In states in which this has occurred, during the period in which the rates caps remain in effect, power from the transferred units typically still is being sold back to the local service provider under a cost-based rate.
The short-term power sell-back agreements pursuant to which these sales are taking place, however, typically expire at the same time as the rate cap.
Once this occurs (i.e., in many states, sometime this summer), owners of coal and nuclear generating units sold in the late '90's will have the right to sell all or most of the output of their units at market-based rates that may increasingly be driven by the price of natural gas -- particularly in the summer months, when electricity use is at its peak.
In any part of the country, this in turn could result in a huge, abrupt increase in the cost of power -- for both end use customers and any local service provider caught in the middle.
This in turn is a hidden time bomb, that could have a major impact on end user costs in the affected states and potentially imperil anylocal utility caught in the middle -- potentially beginning as early as this summer, when the rate caps in several key states are scheduled to expire.
This topic, and other issues relating to the natural gas crisis, will be addressed in detail in the seminar on The Coming Natural Gas Crisis I am putting on in Washington, D.C., New Orleans and San Francisco later this month.
The specifics regarding this seminar can be found at www.energybusinesswatch.com.
-- Andy Weissman
Michael Mandzik 1.2.03
The well-supported premise that the US is about to experience a crisis due to a sharp upward shift in natural gas prices certainly has generated lively commentary, much of it reminiscent of traders 'talking their book', or an 'All Points Bulletin' directing cops on the beat to round up the usual suspects.
We often forget that they price we pay captures the value we place on the consideration we receive. Prices, whether cost-based, market-based or virtually marked-to-model, reflect an underlying commodity or service. Maybe we think that the high cost is unfairly billed, uncompetitive or even anti-competitve. Maybe we think the price upon which we based our life-cycle costed business plan was low as reasonably possible given our warrantied equipment life. ( Maybe we need to extend the data series several more years to average a palatable price per MMBtu.)
But the prices paid in the market, regulated or not, were our economic votes for the value of the commodity, like it or not. When my choices were 8 to 15 cents per kWh from a centrally dispatched fuel stack, $2/MMBtu natural gas gave me good alternatives. When I had to engineer $4 gas at the city gate (with or without counsel), maybe I needed to reduce my consumption and waste instead. Did I need to supply a boiler or process? My price had to be competitive within my own industry. Crisis? That the price for my own products covered my COGS, and let me earn my cost of capital. If not, yes, then CRISIS!
Risk from nuclear waste or accidents? Unacceptable air quality? Provide moratoriums on new construction regardless of changes in demand fundamentals.
Fuel costs skyrocket due to unprecedented demand projections? High cost gas imparing project feasibility? Cry foul and illegal manipulations on those market segments not under our direct regulation.
So, with much of the country's proposed new generation sitting dormant or deep-sixed, does this proxy for decreased demand impact natural gas price support, separate from war or economic disruptions in the petroleum complex? (For the record, price spikes had been recorded before 9/11.)
As gas price volatility expands electricity market clearing price levels, will average cost of service tariff rates provide price transparency to educated consumers or just another opportunity for political blindsiding?
And what contingencies were hedged (6/98) after Midwest power prices ran a few firms into a sea of red? Or natural gas prices, post-Winter of '95? Or crude oil prices, pre-1991? Ok, I'll stop.
Robert O. Johnson 1.3.03
Kudos to Andrew Weissman for bringing a critical issue closer to the public eye. While the nation is facing near term price increases in natural gas, it continues to import a growing share of its "greenest conventional energy" from nearby neighbor, Canada. During the next decade, Canada will begin closing that door in order to service the needs of its growing population and to further develop its extraction of oil from tar sands.
From a global perspective, the portents for an ongoing crisis in natural gas supply becomes even more fearsome. In electrical generation alone, there is the spectacle of North America consuming nearly half the kilowatt hours of the industrial world (1), while representing a little over one-quarter of the industrialized world population. Given that over 90% of new generation capacity requires natural gas, accelerated growth in demand over the next few years is guaranteed. (In California approximately half of our kWh now comes from natural gas.) While the American population takes little notice of scattered announcements for LNG unloading ports, the petroleum and pipeline industries understand the situation, planning for a major expansion, including up to 20 new LNG unloading ports in North America in addition to the three now operating.
The news of an industry gearing up to bring globally plentiful natural gas from where it is located to where it is needed is reassuring. However, this has to be considered in terms of demand from the rest of the world. In addition to the one billion people in the industrialized world, there are an additional five billion living in the developing countries. Virtually all of them now want to watch television and enjoy the other conveniences of electrical power. At present they are busily installing combustion turbine generators using - guess what ?
This brings me to the point of placing a request with Mr. Weissman. Should he be examining the impact of global growth in demand for natural gas, as a function of pricing and availability to north americans, I would be most interested in his observations. The United States is emerging as a major consumer in the international natural gas market at a time of significant growth in developing world demand, approximately 2X that of the industrialized world. This would appear to have major implications on future supply and pricing which would largely overshadow the problems of infrastructure, deregulation and corporate greed currently in contention. Further comments and analysis on this area would be greatly welcomed.
(1) United Nations Energy Statistics Yearbook
Bob Johnson, Mountain View, CA
Alan J Barak 1.4.03
The removal of restructuring price caps will indeed attract the attention of some electricity end users in some places -- just as "all politics are local" so are all economics local. Tthe commenters' observations on the global sources and competitive uses of "our" natural gas are also on target.
I would like to ask you all to consider an attention-getting domestic issue over at the large commercial end-user sector.
We have a large number of state governments in extremis financially. What effect will rising, maybe spiking, gas prices have on their electricity and heating bills? And what strategies should their governors implement now to avoid pain later? -alan barak, pennenergy project, harrisburg pa
Ken Putt 1.8.03
Two observations on an excellent article and thoughtful comments: 1) Why don't electric utilities fully hedge their natural gas supply volumes at known costs to lock in their electricity prices at a base at which they know they can be profitable? 2) I'd like to see a real study on the LNG import situation. My recollection was LNG export plants were reasonably expensive, fairly long lead time, LNG tankers were specialized, in short supply and expensive, and unloading re-gassiffication terminals were fraught with longer siting and environmental permitting delays, not to mention NIMBY problems. I find it hard to believe LNG will "Save America from a Natural Gas shortage." Canadian Arctic gas form the McKenzie Delta, likely the soonest to arrive, will take at lease 5-7 years to get to the U.S., and it seems unlikely imported LNG could fill the gap with sufficient volume or soon enough. I'd also be interested in cost of service comparisons of LNG versus Arctic Natural Gas, East coast, West Coast and in Chicago, say.
