NGSA Chair Sees Full Storage, But No Major Shut-ins

Intelligence Press

The Natural Gas Supply Association (NGSA) expects working gas in storage to reach 3.5-3.6 Tcf by the start of the winter heating season, which, when coupled with the return of Gulf of Mexico production lost in the 2005 hurricanes -- and no significant hurricanes so far this year -- means lower prices for consumers this winter.

"There doesn't seem to be much question that we're going to reach working storage maximums," NGSA Chairman Chris Conway said at the group's annual Winter Outlook briefing. But he doesn't anticipate large production shut-ins occurring in the near term as a result of full storage. Rather than shutting in gas, "there is the possibility of deferring production and selling it forward." Conway, who is also president of natural gas and power for ConocoPhillips, said Chesapeake Energy's announcement Wednesday that it will shut in up to 150 MMcf/d of gross production was the only report of shut-ins that he has heard so far (see Daily GPI, Sept. 28).

NGSA estimates that at the end of the injection season winter storage will be at 106% of the five-year average fill, which, along with 65 Bcf of capacity that was added in the last year, brings the total estimated to be in storage by Nov. 1 to 3,500 Bcf, up from 3,246 Bcf at the beginning of last winter. The Energy Information Administration said two weeks ago that it expects season ending storage to reach 3,429 Bcf at the end of October, which is 298 Bcf above the five-year average (see Daily GPI, Sept. 13).

As always, the wildcard this winter will be the weather. While meteorologists predict the temperatures will be warmer than average this winter, Conway said it still will be cooler than last year -- a factor that could put upward pressure on gas prices. As for the 2006 hurricane season, "it's looking favorable. We may have dodged any significant impact from storms this year."

The NGSA report sees overall gas demand during the upcoming heating season rising 5.7% to 72.4 Bcf/d from 68.5 Bcf/d in the year-earlier period. Residential and commercial demand is expected to see a boost of 5-5.5%, with industrial gas consumption also likely to increase, it said. The demand forecast, if it bears out, could put upward pressure on prices.

"I think this is the first time in maybe four years we're seeing downward pressure in supply and demand fundamentals on price," Conway said, but he warned that "things can happen to change those dynamics."

"I think we need to be careful not to let what could be short-term market dynamics fool us into thinking that long term this market is not tight. We believe it is tight for the long run," he noted. Conway said he was concerned that the current lower prices for natural gas "could take the pressure off of sound policy-making for the future." There still is the need for lawmakers to remove the moratorium on drilling in much of the Outer Continental Shelf (OCS), and for regulators and policymakers to support infrastructure development, he said.

The NGSA estimates that much of the Gulf gas production that was knocked offline following Hurricanes Katrina and Rita is back in action. Gulf gas production for the November-March period last year had plunged to 1.15 Tcf from 1.5 Tcf in the 2004-2005 heating season. The producer association sees offshore gas volumes climbing to 1.3 Tcf this winter season. All told, 800 Bcf of gas production was lost in the Gulf after the hurricanes.

Annual well completions (both offshore and onshore) are forecast to rise to 30,100 for the 2006-2007 heating season from 27,000 a year ago, according to the NGSA report, which cited figures supplied by Arlington, VA-based Energy and Environmental Analysis (EEA). Canadian imports are expected to provide 8.4 Bcf/d of gas during the upcoming winter season, down slightly from the 9.2 Bcf/d for the same period last year, it said. And liquefied natural gas (LNG) imports are anticipated to rise to 2 Bcf/d from 1.5 Bcf/d for a 33% uptick.

All of these factors "are helping this market and [are] putting downward pressure on prices," Conway told reporters.

To meet future demand, Conway said there was a role for both LNG and Alaska gas. "We strongly believe we need to see that Alaska [pipeline] project go forward." He believes there's "some potential" that the Alaska legislature will act on the pipe project this year, although he said "I'm not sure that's a high probability."

Despite the billions of dollars in losses recently reported by hedge fund Amaranth Advisors LLC due to the activity of a single natural gas trader, Conway said he believes the presence of speculators and hedge funds are a "good thing" because they enhance liquidity in the market. He further noted that the potential for a single trader to manipulate the market was "rare."

As for the NGSA's projections last winter, it missed the boat on the weather, demand, storage and supply, the association said. But it noted that it got the bottom line right -- that market conditions would put upward pressure on prices. It's like "we flunked every quiz, but aced the final last year," Conway said. "Why were we so wrong yet so right...The bottom line is there was a huge wildcard" -- the weather and devastating hurricanes.

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