FERC Lauds Low Cost Natural Gas, EIA Says Price Poised To Jump

By Published On: April 16, 2010

The nation’s natural gas supplies are plentiful and in California gas sells for half of what it cost in 2008. That’s the April 15 Federal Energy Regulatory Commission assessment of energy prices. However, some other analysts--including a sister federal agency--say that gas prices may have hit bottom last year and are poised to rise. “What makes this story different is how we get [natural] gas,” said Steve Reich, commission energy market oversight deputy director. Despite concerns about the supply of oil, “technological innovation led to increased gas supplies,” said commissioner Marc Spitzer. That has brought the price of natural gas down, according to FERC, which bases its assessments on data from a commercial energy price tracking service. In California, for instance, FERC said that the 2009 price was about half of what it was a year earlier. Last year, it averaged about $4.15/MMBtu in northern California and less than that in Southern California. On top of lower supply prices, FERC research noted that demand for electricity last year dropped for the second year in a row. Federal regulators added that transmission congestion prices in the California Independent System Operator area fell. They also said that as of April 2009, CAISO embarked on a revamped wholesale market, although the federal commissioners did not assess the efficacy of the year-old market. The relations of the California Independent System Operator and other grid operators makes “one market across the country,” noted FERC chair Jon Wellinghoff. But across town in the nation’s capital, the Department of Energy’s Energy Information Agency released data indicating that natural gas prices seem to have bottomed out and are heading higher. That could affect California, the second biggest gas consumer in the nation. In releasing state data on natural gas consumption and expenditures for 2008, EIA analyst Yvonne Taylor noted that nationwide expenditures on natural gas increased 17 percent over 2007, and that California paid more. That was despite a lower unit cost. EIA data released April 13 show that California spent $23.6 billion on natural gas in 2008, up from $19.8 billion in 2007, a 19 percent increase. This year could see even higher expenditures as the unit cost may rise after largely falling since 2005. EIA April 6 projected that the natural gas spot price at Henry Hub will average $4.44/MMBtu this year, 49 cents more than last year, or an increase of 12 percent. EIA attributed the increase to rising economic activity, particularly in the industrial sector. An April 13 analysis by Pennsylvania State University professor Frank Clemente added that the growing expenditures and upward pressure on the price of gas are due to growing reliance on natural gas to make electricity. He noted that even though gas production has increased, it has not grown as much as forecast, causing a disjuncture between long-term planning and development of natural gas power plants and expected gas supply. For instance, he cited that the American Gas Association late in the 1990s projected U.S. production of natural gas would rise to 25 TCF by 2010, but it now looks like production will be only about 20 trillion cubic feet. “This supply shortfall has not only led to significantly higher natural gas prices, but also to extreme volatility,” according to Clemente. He noted that over the same period natural gas prices have spiked five times. Now, Clemente thinks that the rush to build gas power plants may be prepping the economy for further gas price spikes that threaten economic recovery. California, EIA notes, uses more natural gas to make electricity than any other state except Texas. In 2008, it used 858 BCF of gas to fire power plants at a cost of more than $7 billion. Meanwhile, project developers are planning to open more gas-fired generating plants in the state.

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