OTC panelists expect US gas supplies to stay tight

“Stranded” US power plants that have not locked up gas supplies are a “definite” possibility in a market where gas supply and demand are in near equilibrium, a Dynegy Inc. executive said Wednesday at an Offshore Technology Conference industry breakfast.

With the large numbers of gas-fired generation project announced for the next few years, “you will probably see some of these projects scrapped or delayed,” said Tammy Norman, Dynegy vice-president of energy marketing and origination.

Worldwide electric power generation is helping drive gas demand, said Norman and Mark Croke, managing director, Latin America, for El Paso Corp., which is partnering with Petrobras in developing 700 Mw of gas-fired generation in Brazil.

US gas inventories are projected to remain tight well into 2003-2004, creating an upward bias to both prices and volatility for the next several years, Norman said.

“We will see the infrastructure taxed in ways we never imagined,” she said. This past winter’s demand created “near vertical” movement in gas prices, she said. People were caught off guard after two previous mild winters. But in future, she said, users will respond much quicker to price movements. As prices climbed, industrial users cut back demonstrating demand for gas can be relatively elastic.

US government forecasters are predicting 3% growth year over year in power demand. Gas to fuel power plants is expected to reach 6.8 tcf by 2010. Norman said power sales are tied more closely to gross domestic product than population growth hence demand will be affected by fluctuations in the economy.

The infrastructure to deliver the gas is not the only piece of the system taxed by rising demand. Exploration and production companies are incurring higher costs for lower production yields, Norman noted. The average decline rate in the first year of production has risen to 43% from 25% in1990, she said.

Existing US LNG terminals are nearing capacity, Croke said, while gas demand is growing. El Paso has said it is interested in building new facilities on the US West coast or in Mexico.

“Ultimately, LNG will look to the US as the market of last resort,” he said. El Paso believes it can deliver LNG to Henry Hub at competitive prices, although net back prices to the producers will be small. He cited one case in which discussions were held about delivering Bolivian gas with a netback of 48-52à‚¢/Mcf.

He predicted a global LNG spot market will develop but much of the pricing will be tied to prices at the Henry Hub. World markets will be helped by the end of project oriented finance packages that forced LNG carriers to make point to point deliveries, Croke said.

That has led to idle vessels in a market where shipping rates are rising. What is needed are flexible supply contracts and flexible shipping capacity. Meanwhile, he said, there appears to be an oversupply of liquefaction capacity emerging on world markets.

Croke predicted Brazil will become a big consumer of Bolivian and Argentine gas. But because there is no traded market in gas, except for some physical trades, that has slowed development of new power facilities. Nonetheless, the power needs of the Mercosur trade pact countries of Brazil, Argentina, Paraguay, and Uruguay are projected to grow 610% between 2000 and 2005

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