TWIP, STEO and the prediction of natural gas and oil numbers

A quick glance to see what is new with this week’s “This Week in Petroleum” (TWIP) reminds me that this is the time when the EIA put out a new Short Term Energy Outlook (STEO), which gives their forecast for the happenings the next couple of years. Most particularly it looks at the way supply and demand will play out.

The first thing that caught my eye was the projection that natural gas prices will be (Henry Hub) $4.02 per million Btu (which is as near as need be a thousand cubic feet, which I will use for ease of comparison). This is $0.37 lower than the 2010 average, though they expect it to rebound to $4.50 by 2012. With the bitter cold in parts of the country at the moment (including here) natural gas is currently at $4.55, with $4.53 reported for February futures. It should be remembered that this is not the spot price – which was $17.04 in Florida on Wednesday. Contrast this with the $3.40 price from the Kern River pipeline that goes from Utah to California.

The concern with this relatively low price, going forward, is that it underscores the fragility of the companies producing natural gas from the gas shales around the country. For while there is a constant barrage of optimism about the amount of natural gas that is present in those fields, companies have to make a significant profit over the cost of production if that gas is to reach the market. I don’t see that ability in this sustained price.

There is currently a bit of a row going on in the UK about the state of preparedness of the UK Government for this very cold winter. The lack of proper precautions is being blamed on a forecast of a mild winter by the British Met Office, which is now trying to scramble out from under that prediction. (And apparently they are still guessing at how much that energy cost will be.) This is relevant also to the USA, since I note, at the top of the Natural Gas section of the STEO, this prediction:

EIA expects total natural gas consumption to decline by 0.9 percent in 2011. Projected residential and commercial consumption fall by about 2.7 percent in 2011 partly because of the forecast of 1.3 percent fewer heating degree-days during the winter months this year compared with last year.

Hmmm, temperatures in Tampa Bay are 15 -20 degrees below normal, as I write, and a cold spell, caused perhaps by the North Atlantic Oscillation, continues to make its presence felt across a lot of the country. The season is not, perhaps, turning out to be as warm as the EIA appears to have predicted. They are also projecting that next summer will be a normal one, rather than with the excessive warmth of last summer. As a result they foresee the quoted decline in natural gas use this year, although it will pick back up by 20102.

Total natural gas consumption grows by 1.6 percent in 2012 to 66.5 billion cubic feet per day (Bcf/d). While projected commercial and residential consumption decline by a slight 0.2 percent from 2011 to 2012, the electric power and industrial sectors drive growth with projected increases of 3.6 and 1.6 percent, respectively.

The decline is predicated on the drop in rig count, itself a victim of the lower prices.

While the EIA also sees world demand for oil increasing by 1.5 mbd per year, for the next two, they only project that 0.1 mbd of this growth can be met by countries outside of OPEC. And it is interesting to note that the growth in overall fluids production by OPEC is split almost evenly between crude and other liquids. (The increasing role of NGLs is discussed in more detail at Crude Oil Peak) Most of that growth in demand will come from outside the OECD, with China, the Middle East and Brazil as leading consumer growth. And on the down-side a combination of declining production from Mexico and the North Sea will take more than 500 kbd out of global supply. Alaskan production will fall 50 kbd in 2011, and an additional 20 kbd in 2012 – further slowing the oil flow down the pipeline and increasing the risks from shutdowns. It also foresees a decline of 220 kbd in GOM production in 2011, and a further drop of 180 kbd in 2012. Thus although there is some increase in other domestic fields, by the end of 2012 the decline will total around 150 kbd. And in another Ouch! Russian production, which has been rising, is anticipated to fall slightly this year, and then drop by 230 kbd in 2012.

With those sorts of numbers the power of OPEC can only be expected to grow over these two years. And within OPEC the countries that can increase production are similarly limited in number. That is not to say that OPEC has not, already been somewhat responsive to increased demand. Production overall was raised by 170 kbd in December, according to Platts. Most of this (130 kbd) came from Saudi Arabia, which is now producing some 8.35 mbd. It will be interesting to see how the numbers look a year from now. But I would personally doubt that the prices that we will see will be as low as the EIA predict, while the volumes may not reach the levels forecast – but time will tell.

Looking at the TWIP itself, crude inputs to refineries continued to run about 1 mbd above this time last year, but are set to dip down as demand drops based on the season. In line with that expected fall, both gasoline and ethanol production have also declined a little.