How the Natural Gas Pricing Update for Spring 2013 Affects Your Energy Prices

By Vernon Trollinger, May 8, 2013, Energy Efficiency, News

ngsI have a big, affectionate dog who likes to sit at the other end of the sofa when I’m watching a movie. If I’m eating something, like a big cheeseburger, my dog’s nose gets working, and pretty soon he’s craning his neck vigorously sniffing in my direction. He’s rather crafty, so he knows to slowly nose his way over to me, until, before I know it, he’s right at the edge of my plate, begging for a treat with those big, brown puppy-dog eyes.

Like my dog, natural gas prices are cautiously nosing their way upwards, and before we know it, those prices will be at higher levels than we expected. Thus, because more electric generators are fueled by natural gas, electricity consumers should expect to pay more on their electricity bill in the coming months.

Since more electric power generation companies are using natural gas, the price of the fuel (whether natural gas or coal) can determine which generator is dispatched to meet electrical demand. While natural gas prices fell to historic lows last year, coal use this year rebounded during the cold weeks of March, while natural gas supplies were being used up primarily for home heating. Subsequently, natural gas prices rose. Natural gas used in electric power generation declined by 16% compared to last year and power generators in the northeast are finding that Appalachian Basin coal spot prices are comparatively lower.

Even though this is the time of year when natural gas prices typically hit the bottom of their spring seasonal trough, there are factors at work that are helping prices nose their way higher than they should be.

First off, temperatures this past March took an unexpected nose dive with parts of the country experiencing colder than normal temperatures for an extended period (much to Punxsutawney Phil’s chagrin), as the mercury fell between 8 to 12 degrees below average. As a consequence, average weekly withdrawals from natural gas storage of 99.0 billion cubic feet (Bcf) hit a new record, effectively draining last year’s historic surplus level. Current storage is at 1,673 Bcf (Friday, April 5). At this time last year, gas in storage was at 2,477 Bcf; the five year average is 1,739 Bcf. (See 5-year storage graphic). With storage levels drawn low, EIA succinctly stated, “Natural gas prices increased at most market locations across the country, with more pronounced weather-driven increases in the middle of the country.”

Secondly, the natural gas industry’s efforts to raise prices by reigning in production have finally paid off. Last year’s natural gas rig count at this time was 647 natural gas rigs, already down 25.98% from 2011. Now, the rig count is 375, a further reduction of 42.04%. EIA said in its Short Term Energy Outlook that gas production will average about 66.33 Bcf and that Henery Hub spot prices “will average $3.52 per MMBtu in 2013 and $3.60 per MMBtu in 2014.”

That all said, there remain a few antagonizing forces keeping natural gas prices low.

201302-February-monthlyEven though the rig count has been slashed and production reduced, natural gas production is still very high. Though dry gas production (shale) fell by .03%, EIA’s STEO says that gas production is still 1.6 % higher than last year; up from 69.1 Bcf/d in 2012 to 69.3 Bcf/d in 2013. It’s almost like the natural gas industry has throttled back production so much that they’re extracting it with their pinkie finger. A recent study by potentialgas.org has also raised the amount of recoverable US natural gas resources by 486 Trillion cubic ft (Tcf) up from 2,688 Tcf or about 26% more.

Obviously, the natural gas companies that have invested billions of dollars in drilling leases are not going to pack up their toys and go home. Chesapeake Energy, the #2 natural gas producer in the nation, pumped so many dollars into drilling and leases that it is now $14 billion in debt. The only way producers can make lots of money is by producing lots of natural gas —but they can’t produce so much that it outstrips demand. They go bust, then. That’s why the natural gas industry is looking at exporting liquefied natural gas (LNG).

However, there are some natural gas companies that would prefer to keep as much US natural gas in the country as possible to keep gas prices low. One of the natural gas liquids by-products is Ethylene , a hydrocarbon used in numerous products: plastics, detergents, and anti-freeze. The battle lines are still being drawn.

The take-away for all this has some good news and some bad news.

The Good News: While prices are increasing, they are nosing gradually along. As of this writing of this article (April 15, 2013 at 2:00 PM), the NYMEX price is 4.20/MMBtu, up from $3.680/MMBtu a month ago. There is also no shortage of natural gas and power companies that still see the advantages to using natural gas a fuel. These price increases may also benefit states like Texas, making it more likely to attract more power generation investment which they sorely need.

The Bad News: Obviously, energy prices are still going up, making it very prudent to lock in a long-term electricity rate. EIA also forecasts that prices for first 9 months of 2013 will be well above the same period as 2012, especially since early summer temperatures are expected to be above average in the south-central part of the country this year. To meet demand, generators will likely turn to coal to keep energy costs somewhat low. All the same, there may be a hiccup in this. On March 29, the U.S. Solicitor General has petitioned the Supreme Court to review the D.C. Circuit Court’s decision on Cross-State Air Pollution Rule (CSAPR). The U.S. Court of Appeals for the District of Columbia Circuit struck down the rule saying CSAPR required a state (Texas, for one) to reduce its energy emissions by an amount actually greater than its contribution to another state’s air pollution. IF that came to pass (and there’s no odds either way right now), timing with the summer heat could be crucial. Affirming the EPA’s rules could idle many old coal plants.

The greatest source for concern here is the uncertainty regarding what follows the “shale-liquor” hangover experienced by the  natural gas industry. How the immense supply of natural gas (3,174 Tcf!) will change the energy landscape remains to be seen. At this point, the natural gas industry seems content to follow its nose.

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