Gas producers expect to recapture fuel switching market this winter

By the OGJ Online Staff

WASHINGTON, DC, Sept. 25, 2001 – The Natural Gas Supply Association said Tuesday that the US gas industry should recapture the fuel switching market this winter, both in the power generation and industrial sectors.

It predicted gas demand will slide 2.1% or 250 bcf to 11.44 tcf, assuming the nation’s economic recovery is delayed by uncertainty over military events in the Middle East.

The report said residential and commercial demand should drop 395 bcf (6.6%) this winter to 5.599 tcf, industrial use should slip 176 bcf (4.8%) to 3.524 tcf, electric generation demand should jump 338 bcf (29.6%) to 1.481 tcf, and production-pipeline consumption should slide 17 bcf (2%) to 841 bcf.

NGSA said, “While gas demand within the electric sector increased 31 bcf last winter, demand would have been much higher had it not been for fuel switching to residual fuel and in several cases, distillate.

“The latter was an unprecedented event. For the first time in the history of the industry, it was cheaper to burn distillate in a steam generator than was natural gas in either a stream generator or a more efficient combined cycle unit.”

It said gas was not competitive in either power generation method with fuel oil (residual or distillate) and only recently has it recaptured the dual fuel market.

“With fuel prices remaining strong, it is anticipated that fuel switching during the forthcoming winter will be confined to a relatively few days when spikes in gas prices may occur due to frigid weather. As a result, electric sector demand during the winter should be about 2.2 bcfd higher than last winter, which reflects some increase due to new plants coming on line.”

R. Skip Horvath, NGSA president, said, “Our analysis reveals a dramatically different natural gas market than this time last year, when we were expecting and experienced, a rough winter heating season. While the fundamentals that drive the natural gas market all pointed toward higher prices last year, this year’s fundamentals reveal a much improved scenario for consumers this winter.

“The economy is weak, greatly slowing demand for natural gas. In fact, since the tragic events of Sept. 11, we updated our analysis to reflect that the industrial demand we expected to come on line is now delayed.”

NGSA noted that last year, record cold in November and December drove spot market prices up. It said although cold weather in the Northeast and Midwest regions may be volatile at times, temperatures are expected to be within the normal range.

Horvath said gas production is 1 bcfd higher than a year ago, enough to heat 4.3 million more homes and decreasing price pressure on the market.

He said, “Prices are at their lowest point since April 1999, a date in our industry that marks the end of our last very low price cycle. As a result, we are seeing a decrease in the rig count as capital is being reallocated to reflect market conditions.”

NGSA said demand is flat, and would be down except for electric generation coming on line this year, helping to replace lost demand from industrial, commercial, and residential customers.

It said unlike a year ago, storage is almost full. Forecasters are predicting the US will end the storage season Nov. 1 with 500 bcf more than last year.

Horvath said, “The fundamentals that move the natural gas market paint a very good picture for consumers this year. However, we have to consider market wildcards, things we cannot predict, such as escalation of our military preparedness, and how these circumstances affect the market.

“A competitive market has only been in place since 1993, after the Persian Gulf War, which leaves us with little experience for comparison.

“Although wildcards do exist, for the short-term at least, we do not expect sustained price volatility. In the long run, in order to overcome a fundamental tightness of supply, we must still overcome barriers to exploration and production to ensure a robust natural gas supply.”

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