Gulf gas, conservation vital to winter prices: Kelliher

Washington (Platts)--22Nov2005

With the stark realities of higher heating prices virtually assured this
winter, the chairman of the US Federal Energy Regulatory Commission, Joseph
Kelliher, on Tuesday pressed consumers and electricity generators to do all
they can to conserve natural gas and other heating fuels. 
     He also sought to quell expectations that more liquefied natural gas
imports and more Canadian imports can make up for lost production in the Gulf
of Mexico due to Hurricanes Katrina and Rita.
     Three factors will drive natural gas prices this winter, Kelliher told
reporters Tuesday at the National Press Club in Washington. They include the
severity of the weather; the recovery rate of offshore gas production, which
is expected to be down at least 2 Bcf throughout the winter; and the emphasis
put on conservation by individual and industrial consumers and gas-fired
electricity generators.
     "Those are the three key variables that have driven prices in recent
weeks, and they will through the end of the winter heating season," he said.
     Consumers should not depend on imports to fill in the gaps, Kelliher
said. Canada is using more of its own gas and exporting less, and despite high
US spot market prices, LNG importers continue to lose out in a bidding war
with Europe. UK January gas prices traded Tuesday at around $20.60/MMBtu
(GBP1.20/th), Platts data showed.
     He added that import terminals are operating at less than half-capacity
as foreign LNG production has fallen far behind global demand.
     Until new LNG import terminals are built and begin accepting shipments
around 2008, and until overseas investments in liquefaction projects catch up
with demand, gas supply and demand will remain tight, he said.
     "The limiting factor is not the North American pipeline network between
the US and Canada. It is not the LNG import facilities that the commission has
approved," Kelliher said. "It is liquefaction of LNG abroad and Canadian
production itself. I think these facts are helpful because they tell us that
prices will be higher this winter."
     Kelliher said he is not sure what could be done to encourage
international liquefaction investment, but appeared to be certain that the
long-term contracts established by US terminal developers would guarantee
future supply.
     Still, though the FERC chairman said the signing of long-term contracts
is critical to booking supply and mitigating future price volatility, he added
FERC cannot compel them to sign long-term contracts.
     The good news, Kelliher said, is that shut-in Gulf Coast production has
come back on-line more rapidly in recent weeks. That will have "a permanent
positive impact" on winter prices. Nevertheless, natural gas prices would be
high, as they were before the hurricanes, due to fundamental conditions such
as flat domestic production, flat imports and flat Canadian production levels.
Conservation is a critical short-term solution, he said.
     The key to conservation, Kelliher said, is that the residential,
industrial and commercial consumers "appreciate that gas prices will be high
and they change behavior; that they increase effort to conserve. We don't have
jurisdiction over retail sales, but we've been trying to send that message
loud and clear."
                                     --Joel Kirkland, joel_kirkland@platts.com

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