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High Gas Prices: The Edge Comes Off

High Gas Prices:
Fortnightly Magazine - November 2004

coupled with high consumer debt and high oil prices, 6 is especially troubling.

A major increase in energy expenditures could reduce expenditures on a wide assortment of other products and services, creating a tailspin in the performance of the overall economy this upcoming heating season. Moreover, in light of the past events, some new and largely unrecognized factors will influence the shape of the market this heating season but especially going forward.

Imports and Inventories: The Backup Supplies

Because Canadian gas overall-and specifically gas demand for tar sands processing-is up, and East Coast Canadian supplies are down, Canadian imports capability until the end of December likely will get reduced yet again. Fortunately, the summer of 2004 was a very mild summer for much of the United States. Accordingly, natural-gas inventories built to very robust levels as less than expected natural gas was required to serve natural-gas power generators. Between early August and early September 2004, the daily wholesale price plummeted more than 25 percent.

Until the end of December, natural-gas utilities will tend to rely on wholesale markets to satisfy sudden shifts in demand, while closely following storage withdrawal plans. Accordingly, if the weather turns cold in November and December, the price could increase more than 30 percent over several weeks. If the weather continues to be mild and if inventories are still robust, the price could fall 25 percent or more over several weeks.

Supply

The Energy Information Administration (EIA) has reported that Alaska's North Slope has 35 Tcf of discovered natural gas resources to date, with 16 Tcf yet to be discovered. 7 If a pipeline were built to flow 2 billion cubic feet (Bcf) a day, or about 900 Bcf of natural gas per year, this would represent a significant amount of incremental gas to supplement domestically produced natural gas, LNG, and readily available gas from storage. Nine hundred Bcf is about equal to the shift in demand between a relatively mild year and a cold year. EIA also has estimated that a wellhead price above $3.48/MMBtu (in 2001 dollars) or $3.68/MMBtu (in 2004 dollars) could support the planning and development of a pipeline from Alaska. But any pipeline project would not commence prior to 2006 and would not be completed until 2013 at the earliest. The exploitation of the Mackenzie Valley in Northwestern Canada has significant but lesser amounts of natural gas in place, but a pipeline from that area could be built much sooner than the planned Alaskan pipeline.

Several major LNG terminals are now moving faster through the planning stage, not only in the United States but in Canada-an indication of the tightness of the supplies and the expected sustainability of high prices. Major terminals can deliver half a Bcf of gas to market on a day. 8

LNG imports were 510 Bcf for 2003 and are expected to be 710 Bcf and 820 Bcf for 2004 and 2005, respectively, according to recent EIA statistics. These forecasts will be exceeded if LNG facilities take steps to reach their cycling potential. As long as prices stay at