Update on Gas in Storage

Natural gas in storage in the US continued its decline in the most recent update from the US Energy Information Agency. (Why doesn’t Canada publish this type of data?) The ongoing cold winter reduced the gas in storage to 896 Bcf. This compares with the 5 year average of 1822 Bcf, a reduction of 51%. Gas in storage dropped in the week ended Mar 21 by 57 Bcf. Last year in the same week gas in storage was pretty much the same as the week before.

The week after Mar 21 has certainly continued cold in Eastern Canada, with overnight lows in the double digits C, and daytime highs below freezing. The heating season is not yet done. And the updated temperature forecast for April, May and June is below average temperatures. Demand will drop, as it will be warmer than before, but the heating season will continue, offsetting at least some of any new injections into storage.

To give this perspective, to get the storage levels back to the 5 year average will require 2900 Bcf of extra production. This is 8% of US annual demand. If we assume that some some of this is typical, and so built into demand last year, we still have a need for 3% more production just to restore gas in storage.

3% is a pretty hefty addition to gas demand. Last year, demand for gas increased by 2%, so a 5% increase in production is needed. Today’s gas supplies are increasingly available from fracking. Fracked wells have very fast decline rates, often more than a 50% reduction in a year. So to produce more gas requires more drilling and more fracking. It is moving to a “just in time” business model.

With a 5% increase in demand, prices will remain high, and demand for drilling rigs will be strong, and may outpace supply. The price of drilling will no doubt be strong, which will continue to underpin higher gas prices for the next year at least. The Henry Hub spot price yesterday was $4.42US, compared to $4.08 a year earlier, and $2.16 the year before that.

The solution to the gas shortage and price problem is to reduce the 31% of US gas consumption used to generate electricity. This is exactly what renewables do. The US production from wind will likely increase by almost 1% of US demand this year, or certainly by next year. Ontario is likely to be even stronger, with a doubling of supply from wind by 2015, enough to drop gas demand from 11% of Ontario’s supply (2013 data) to closer to 7%, all else being equal. Of course all else is never equal with Ontario with its reliance on it unreliable nuclear plants, and gas consumption to generate electricity is no doubt higher in Ontario so far this year due to electric heating demand.

Bring on the renewables, and drop the gas price. Sounds like a winner.

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