Pricing factors for natural gas — weather, market conditions and production capabilities — have been more favorable to business consumers this spring, but the summer break, when natural gas prices are at their lowest in Mississippi, may be short-lived.
“Natural gas prices are in the $5.25 (per thousand cubic feet) range for the summer and winter,” said Phil Hardwick, vice president of community and economic development for Mississippi Valley Gas Company in Jackson, the largest natural gas distribution company in the state.
“The past few years, one would have seen summer prices around $2 and winter prices around $3.50,” he said. “But it’s a brave, new world in the energy industry. If the summer is hotter than normal, look for natural gas prices to go up, but not spiking like they did this winter. If the summer is cooler than normal, you will see more gas go into storage, which should help prices this winter. It will take about two years to see prices benefit from the new exploration.”
Strong demand during November and December, which the National Weather Service called the coldest on record, reduced gas stocks to record lows and fueled higher natural gas prices around the nation. Wholesale gas prices at Mississippi Valley Gas nearly quadrupled over a two-year period — from $2.17 in January 1998, to $9.86 last December.
During the summer, natural gas is used primarily for manufacturing and electric power generation. During the winter, total demand for natural gas, prompted by residential heating requirements, is 50% higher, exceeding production and import capabilities.
Since 1985, consumption has exceeded U.S. production, and Canadian imports now account for 15% of U.S. consumption.
Since 1997, U.S. production has declined because new gas wells have been unable to offset a doubling of production well decline rates in the 1990s, and a similar pattern has emerged in Canada.
Despite fuel costs, gas-fired generation keeps growing and many energy experts say it will put a considerable strain on the gas market. Roughly 90% of new capacity to 2010 is planned to be natural gas fired.
“For the last month or two, we have been meeting off and on with representatives from the natural gas industry — from natural gas suppliers to interstate pipeline people — and walking through different scenarios of what they see coming up,” said Mississippi Public Service Commissioner Nielsen Cochran.
Even though no concerns loom in the near future, growth in new electric generation plants and continued increase in demand on natural gas supply could signal a problem, said Cochran.
“Looking seven to nine years down the road, if we don’t have a concerted effort to address the transmission of interstate natural gas and overhead electricity, then there will be a problem of transmitting natural gas and electricity to our native load here in Mississippi,” Cochran said.
In addition to its own fields in the northern part of the state and six interstate pipelines, Mississippi Valley Gas routinely contracts for salt dome storage in South Mississippi during the summer, when natural gas prices are lower. It is then mixed with new gas in the winter to moderate prices.
“One of the main purposes of the storage field is to have natural gas available on peak days and to back up our system in Tupelo,” Hardwick said. “We primarily contract for storage service as it is more economical than paying for pipeline capacity all year long when we only need the ‘large’ amounts of capacity during the cold winter months. Additionally, historically at least, summer gas has been less expensive and the storage has that added benefit. It is difficult to look at the current NYMEX strip and say that the historical spread between summer and winter gas will not hold. However, that is certainly a concern of ours, and we are trying as best as we can to get gas into storage that at least will not cost more than the flowing winter gas. Our storage volumes in total represent about 25% of our annual core market sales — residential and small commercial customers.”
Now that $2 gas is gone, salt domes are being replenished with $5 gas, Cochran said.
“I don’t know if we’ll ever see that pricing opportunity again,” he said. “Natural gas prices are going to continue to be highly volatile. We have to see what happens this summer and early fall, and I don’t think there’s anyone that won’t predict that we may have the same problem next winter that we had last winter. It’s going to be tight.”
Experts are predicting a break in weather extremes this summer, perhaps giving the natural gas industry an opportunity to recoup its supply.
Earlier this month, noted weather forecaster William M. Gray of Colorado State University’s Department of Atmospheric Science predicted that most of the U.S. will experience moderate temperatures this summer and a mild hurricane season because of a weak to moderate El Ni