Nov. 18–CLEVELAND, Ohio — The notion that the shale gas boom will give Americans 100 years of cheap national gas is going to be tested this winter. And consumers will get the bill.
There is more gas flowing from the earth than ever before, according to federal and industry statistics. Yet the amount of gas salted away in underground storage to get the nation through this winter is running way behind — 16 percent below the five-year average for this time of year, a U.S Energy Information Administration report showed earlier this week.
In fact, the amount of gas in storage at the beginning of November is the lowest it has been since 2005, the EIA data indicates. At the same time, heating demand is the highest it has been in the last three years,
The storage deficit, plus far colder weather than what had been forecast for October and November, destabilized gas prices, which led to a sudden price increase this past week.
The question now is: Are those increases a new price floor, a temporary spike or a sign that prices will become volatile every time the mercury drops?
It’s doubtful that a lot of additional gas will go into storage at this point, given the lower-than-normal temperatures over wide areas of the nation.
A decade ago, before shale gas, horizontal drilling and hydraulic fracturing became household words, low gas storage and lower than normal temperatures in November could send prices soaring for much of the winter on fears of shortages.
That’s exactly what began this past week.
After spending most of this year below $3 per 1 million BTUs, roughly the amount of energy in 1,000 cubic feet or 1 Mcf, contract prices on the New York Mercantile Exchange for gas to be delivered in future months screamed past $4 and toward $5 per Mcf on Wednesday, ending the day at $4.84 per Mcf for gas delivered in December and $4.90 for January gas.
Some of that meteoric rise evaporated on Thursday but returned on Friday before slowly falling. December contracts ended the day at $4.35 per Mcf and contracts for delivery in January closed at $4.38 per Mcf. The contracts were about $3 on Monday.
In a note to investors at the beginning of the Wednesday price run-up, analysts with Morgan Stanley noted that the market had “over-corrected” for the colder than normal weather.
“This November is expected to be one of the coldest in the last few decades,” they wrote, noting that “2018 has been a year of weather extremes in the U.S., including the coldest April in 35 years, the hottest May through September on record, and the first colder-than-normal October in nine years. November is following the trend, with the current forecast one of the coldest since 2000.”
Morgan Stanley viewed the sudden spike as temporary.
Unless these new higher prices retreat, consumers who rely on the monthly variable Standard Choice Offer provided by Dominion and Columbia will see their prices increase at the beginning of each billing month. That SCO is based on the national commodity contract price. About 200,000 of Dominion’s customers use the SCO.
Dominion’s SCO rate, effective from Nov. 12 through Dec. 12, is $3.255 per Mcf, and reflects commodity prices set earlier on the NYMEX.
The Columbia Gas SCO in place until Nov. 28, is $0.44150 (44.1 cents) per 100 cubic feet (Ccf), also based on an earlier NYMEX contract price. About 60 percent of Columbia customers rely on the SCO.
NOPEC’s fixed Dominion rate is $3.75 per Mcf and its Columbia rate $0.472 per Ccf.
Consumers considering fixed price contracts offered by independent gas marketers could see contract price offers increasing as the marketers try to stay ahead of the price run-ups. The PUCO maintains marketer prices on its Apples to Apples website.
There is a chance that the markets could calm down somewhat because the amount of new gas flowing from wells is at record highs, currently running 10 percent higher than year-ago production rates.
The situation — lower amounts of stored gas than considered crucial in past years but record amounts of gas flowing into the pipelines — has not occurred before, said Christopher McGill, an economist and vice president of energy markets analysis and standards at the American Gas Association.
He said the lower storage and an unusually cold fall is a classic set-up for high prices. “You are seeing some of that but it is tempered by the reality that there is more flowing gas than anyone has ever seen before,” he said. “The additional production is tempering the upward price volatility.”
In his November summation and analysis of gas market, Natural Gas Market Indicators, McGill noted that gas production has generally been above 84 billion cubic feet per day this month. He wrote that demand was 75 to 80 billion cubic feet per day before the arrival of winter weather and is now heading toward 100 billion cubic feet per day, a point at which heavy withdrawals from storage will have to be made.
Both Dominion and Columbia have enormous gas storage facilities in Ohio.
Dominion stores 55 billion to 60 billion cubic feet of gas in an old well-field north of Canton. The company may inject additional gas into the field if levels begin to decline precipitously this winter, said Jeff Murphy, vice president of the company. “It improves deliverability,” he said, meaning the additional gas makes it easier to withdraw gas. He added that traditionally injections stopped at the beginning of November but the availability of so much flowing or new gas this year may make additional injections possible.
Mike Anderson, director of supply for Columbia Gas of Ohio, said the company has contracts for 84 billion cubic feet of winter storage, the majority of it located in depleted wells in Ohio. The reserves were about 95 percent full when cold temperatures arrived, he said.
Anderson added that storage here and in he Upper Midwest are in good shape and that the lower overall storage reflects shortages in the states along the Gulf of Mexico.
What could go wrong?
Gas production may be soaring, but the fuel has new uses beyond space heating. New customers include a growing fleet of gas-fired power plants and newly-built gas liquefaction plants that are shipping the clean-burning hydrocarbon overseas where prices are as much as one and one-half times higher in Europe and twice as high in the Far East.
Gas power plants are expected to burn about 29 billion cubic feet of gas per day, up from a little over 25 billion cubic feet a year ago as new power plants come on line. And liquefaction facilities for export are taking 7 billion to 9 billion out of the system.
The result is that national gas storage levels may not be restored to previous levels, and could even fall further behind to record lows next March if the winter becomes a bear.
AccuWeather’s latest long-range forecast includes a bear of a February. The average temperature for the month may run 2 to 3 degrees below normal, said Bob Smerbeck, a senior meteorologist with AccuWeather.
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