What to Expect From Natural Gas Prices in 2011
Natural Gas Powers Texas
The US Dept. of Energy cites Texas as producing and consuming more electricity than any other state. Texas is the largest natural gas producer in the nation, suppying one quarter of that total output; storing and supplying natural gas via pipeline for all regions of the country. yet while Texas has large reserves of low grade coal, most of what is burned in its coal-fired plants is brought in via train from Wyoming and Montana.
So, it makes sense for Texas electric power generators to rely more on the supply of natural gas in our back yard rather than waiting for the next 10,000 tons of coal to roll in from Wyoming. Over half of Texas’ energy comes from natural gas-powered generation plants. It burns cleaner than coal and does not leave behind large amounts of cinder and ash that require proper disposal.
Natural gas and oil have been twin commodities that helped build Texas. Natural gas pipelines stretch in all directions from Texas and it has long been used throughout the US for heat, light, and electrical generation. so, it’s little wonder that in this country its price has long been bound to oil, a commodity in a very volatile market where prices are often shaped by world events. For this reason, power generating companies have paid more for natural gas than coal, nuclear, and wind. because it is the most expensive and so heavily relied upon in Texas, the price of natural gas determines the price of Texas electricity.
Comparing 2009 Natural Gas with 2010
You have probably noticed that the summer of 2010 was warmer than 2009. according to the EIA’s the use of natural gas for electric power generation surged this year because of the 23 percent increase in U.S. cooling degree days, resulting in an over 300 Bcf (11 percent) increase in natural gas consumption in the power generation sector over the last 4 months compared with the same period last year.
In spite of hot weather driving electrical demand, large surpluses are still in storage. the August 27th working natural gas inventory was 3,106 billion cubic feet (Bcf). While this is 169 Bcf more than the 2005-2009 average, it was still 208 Bcf less than the record levels of 2009. June, July, and August also witnessed hurricane threats that shut-in 7.9 Bcf and slowed production. the EIA originally predicted 57.4 Bcf produced for this period. New deep-sea gas wells were also shelved as part of the drilling moratorium following the historic BP oil spill in the Gulf on April 20, 2010. An official recommendation about when to end the moratorium might be released by the end of September.
Horizontal drilling for shale gas and liquefied natural gas technologies both came of age when natural gas prices were high. Drilling companies were able to take on lots of debt to bore new wells into vast untapped US shale gas plays. An interesting example is the Kardell Gas Unit 1H which is pumping in the Haynesville Shale in San Augustine County, Texas. Back in October, 2009, this well achieved a continuous 24 hour flow rate of 30.7 million cubic feet (Mcf) with a flow pressure of 6,824 psi. Unfortunately, numbers have surfaced showing that shale gas wells are very short term producers, yielding enormous amounts in their first year but dwindling quickly over the following few years. how this factor will affects the industry in the long term has yet to be clearly addressed.
Unfortunately for the industry, profits seemed to be dwindle from their wells just as quickly. It’s prices dropped in in late 2008/early 2009 and remained low throughout 2010. Liquefied natural gas imports (both via pipe and ship) into the US have dropped from 56,410 Million Cubic feet (Mcf) in January 2010 to 32, 521 Mcf in July, 2010. whether it was to just stay in business or maintain drilling rights to acreages, drilling companies drilled more wells and produced more gas -which drove prices down further. Dave Pursell, managing director and head of macro research for Tudor, Pickering, Holt & Co. Securities inc, characterizes the shale gas rush by stating, This industry is drunk on shale liquor and can’t get sober fast enough to avoid a low-commodity-price hangover..
Over the course of 2012, the EIA predicts natural gas production falling by 1.2 Bcf (1.9 percent) as low commodity prices apply the brakes to drilling rigs. Some of this can be attributed to major US gas producers, Chesapeake Energy and EOG Resources. they announced that they will be reducing their shale gas operations and switching to developing natural gas liquids operations. Natural gas liquids are extracted in conjunction with natural gas at the surface in gas processing or cycling plants and include propane, ethane, butane, pentane and natural gasoline.
Troubled Waters: Fracking
Hydraulic fracturing, or fracking, uses water, sand, and chemicals at very high pressure to crack shale rock formations and enable the natural gas in the shale deposits to migrate to the well head for collections. While most of this is done at depths most experts have argued are below water tables, there has been evidence in 6 states showing the process is fraught with documented instances of methane contaminating aquifiers and exploding drinking water wells. the issue has been made all the more controversial in the public eye by Josh Fox’s film, Gasland.
In answer to public concerns, the US EPA plans on beginning a new study in 2011.
The EIA expects near-normal summer weather conditions for 2011. the reason being that the strong El Nino effects of 2009 will have played themselves out. the National Weather Service predicts the winter for December, 2010 through February, 2011 as drier with above normal temps in Texas and the southwestern US with the bulk of country likely to experience equal chances of normal conditions. the same weather pattern is expected through April and into the summer with higher temperatures moving solidly into the southwest.
As a consequnce, the EIA projects flat consumption through 2011 with the bulk being used by expansion in the electrical generation and industrial sectors – lending some credence to a recovering economy.
2011 Solutions for the Texas Energy Consumer
In May, the EIA reported that the average price of Texas electricity was 11.6 cents/kwh and would rise to 11.9 cents/kwh in 2011. since May, the real average price has dropped to just over 10 cents/kwh. This is partly a factor of natural gas prices dipping lower during the fall due to moderate temperatures throughout the country.
It is cheap right now but is expected to trend upwards as the winter heating season gets underway. EIA pegs that amount at $4.76/MMbtu. For the Texas electricity consumer, this means it is still a buyer’s market for a little while. On Sept. 21, mid-afternoon prices for October delivery at the Henry Hub were $3.82/ MMbtu. yet it is still an uncertain world. Later in the day, the price rose 9 cents to $3.91 as the National Hurricane Center announced that an Atlantic storm was potentially threatening gas rigs in the Gulf of Mexico.
Even still, it’s great time to shop around for a fixed energy plan that can save you money.
If you sign on to a two year plan now, you can lock in the current low fall 2010 rate through fall 2012. Switching now when rates are low could save you hundreds of dollars over the next two years. Why? because you can take advantage of a long-term fixed-rate energy plan that locks in the current low energy price. While the EIA projects that prices will be flat in 2011, prices are likely to gradually rise towards the end of the year as large gas-producing companies, like Chesapeake Energy (which produces 2 Bcf/day), migrate their attention to more profitable natural gas products. the record surplus natural gas in storage will gradually be used up and not immediately replaced by producers. Another factor influencing the nature gas market will be the EPA’s report on fracking which may adversely impact future production costs in shale gas plays.
Consider the September 21 price of $3.91/MMbtu and the EIA prediction of natural gas rising to $4.76/MMbtu in 2011. That’s an increase of 21%. right now, if your energy plan is locked in at 10.4 /kWh for 1500 kWh per month, you’re paying about $156/month. but in 2011 given a possible minimum increase of 21% in natural gas, your bill could jump by that much to $188.76/month. That’s a difference of $32.76/month or $393.12 for the year.
Don’t worry. Now is exactly the right time maximize your savings for these next two years to take advantage of the current low prices.