EIA Predicts Supply Shortfall Will Linger Through Winter

The Energy Information Administration said yesterday in its September 
Short-Term Energy Outlook it is projecting natural gas prices at the wellhead 
will increase by about 87% this winter (October-March) compared to last 
winter. Residential prices for gas are expected to rise on average by 27% 
compared to last year. For the entire year, the average wellhead price for 
natural gas is projected to be $3.40/Mcf, the highest annual wellhead price 
on record (in inflation-adjusted terms, it would be the highest annual 
average price since 1985). 

The short-term supply constraints that are currently hindering the industry's 
ability to meet storage and power generation demand at the same time are 
likely to continue into the heating season, EIA said. Storage levels could 
end up being about 8% below the five-year average of about 3,000 Bcf by the 
start of winter if net injections continue at 10% below historically average 
rates through the remainder of the refill season. 

The effects of increased drilling for gas are not expected to appear in the 
form of significantly increased production until after the next heating 
season, according to the agency's report. 

"For now, we are continuing to maintain a conservative view of possible 
increases in domestic gas production for 2000 and 2001, with assumed 
increases of 0.5% and 1%, respectively, for this year and next...," the EIA 
report stated. "On the other hand, the U.S. natural gas rig count on Aug. 25 
was at a recent high of 794 rigs. Exploration and production budgets for many 
natural gas producers are expected to increase sharply in 2000 and 2001, 
spurred by higher prices and greatly improved current and expected revenues 
from producing assets. Also on the positive side, data from the Texas 
Railroad Commission suggest that, through May, year 2000 gas production 
increased, if only slightly (0.4%). This signifies a turnaround (however 
modest) in a key producing region. Very high gas drilling rates, including a 
record-setting pace in deep offshore Gulf of Mexico, confirm that 
increasingly positive results for domestic gas production are under way." 

Imports are projected to rise by about 12% next year primarily because of the 
1.35 Bcf/d Alliance Pipeline coming on line next month. 

Meanwhile the demand outlook remains bullish at 4.2% annual growth. In 2001, 
however, the forecast has been revised downward to 2.5% growth because of 
higher than expected natural gas prices. The industrial sector is the leading 
sector for demand increases in 2000 at 9.3%, while electric utility demand is 
expected to decline by 4.0% primarily because of power plant sales. For the 
power generation sector as a whole, gas demand is expected to grow 6.5% this 
year and 1.5% in 2001. EIA said the reduced growth rate next year is largely 
due to the reversal in relative prices of fuel oil and natural gas, which 
began in August, with fuel oil gaining the price advantage as gas prices 
continued to rise. 

Gas demand this winter is expected to be up by 5.7% compared to last winter 
if weather is normal. Normal weather implies a 12% rise in heating 
degree-days compared with last winter.