What to Do With All that CASH?Seeing no need to build, utility managers are looking
to invest. Can they be trusted
with stockholder money?With little of the fanfare that surrounds...
in any market, incessant reports of problems, real or imaginary, raise anxieties and move market sentiment. For utility planners and large gas consumers, the news has not been good during the spring and early summer. Spot and futures prices continued upward, and the need to secure flowing gas supplies is pressing. As will be discussed further below, there is very little accurate current information on the state of the gas market other than prices and the weekly storage inventory figures from the U.S. Department of Energy's Energy Information Administration (a report that, in my estimation, has assumed inordinate importance to market participants simply by virtue of the fact that it is the only piece of current non-price market information available).
While it is true that commodity prices are primarily the result of market expectations (however uninformed), not the cause, technical analysis of recent gas price behavior also influences price expectations and thereby affects transactional activity and portfolio management decisions. If the factual assumptions that created the expectations are flawed but unchallenged, any technical analysis of price behavior only exacerbates the underlying error. Therefore, I would ask you to suspend belief for a moment, and examine the fundamentals on which the price run-up is based.
Last year saw a significant increase in gas demand due primarily to new gas-fired generation and a cold (actually, normal) winter. Presumably, new gas-fired capacity scheduled to come on line in 2003 will only exacerbate the gas deliverability problem. Demand destruction in the industrial sector would appear to be insufficient to counterbalance this increasing power sector demand. This argument, however, ignores the fact that power sector gas demand, like industrial demand, is price-sensitive. Last year, with gas prices in the $3.00/MMBtu range, combined-cycle gas turbo-generators (CCGTs) generally were baseloaded. Meanwhile, most coal-fired steam plants were being deeply cycled during off-peak hours. Gas consumption may have been up, but coal consumption was down. 2 With $3.00 gas, it is cheaper to run the CCGT off-peak (and avoid accelerated maintenance costs and start-up heat rate penalties) than to shut it down. However, the break-even point on overnight CCGT operation is in the $4-$5/MMBtu range, depending on other associated costs and off-peak power prices.
This summer should see much higher off-peak coal plant utilization and a symmetrical reduction in gas consumption unless gas prices drop significantly. This price-induced demand destruction can be added to the other causes of reduced gas demand, including the closure of industrial facilities using natural gas as a feedstock, and the inordinately mild weather experienced in much of the country this spring.
As noted above, the EIA storage report has become, for better or probably worse, a major weekly event in the North American gas market. 3 The news over the past winter was of a rapid and continuing inventory drawdown as cold weather in the eastern United States persisted. The obvious explanation was that available production was inadequate to meet its usual share of winter demand, necessitating depletion of storage inventories.
There were other factors afoot, however. The merchant energy financial crisis