Winter gas heating bills will probably be higher than a year ago, but no crisis predicted

Source: Cleveland Plain Dealer

CLEVELAND, Ohio — It’s Labor Day, and for some, that means it’s time to think about winter — and what it’s going to cost to heat your home.

Your home is losing two additional minutes of sunlight (and heat) every day; and despite this past week’s warm temperatures, the cool down has begun. In just eight weeks, or even sooner, you will need your furnace in order to be comfortable overnight.

Despite earlier dire predictions of gas shortages this fall because last winter was so cold that by April 1 gas storage reserves had fallen to record low levels, the experts now think there will be a healthy amount of gas in storage by Nov. 1.

That’s good news. But it’s only part of the story.

What changed the situation are shale gas wells that produced more new gas every month than the month before, and the cool summer that kept demand for electricity and gas for power generation below expectations, say analysts.

Because of shale wells, the amount of new gas flowing into new pipelines — and into storage — has set records.

While storage levels currently are still running below year-ago levels and below the five-year average, according to the U.S. Energy Information Administration, analysts expect that by Nov. 1 there will be enough gas in storage — and enough additional gas flowing from shale gas wells — to keep prices stable during this winter.

“There has been a measurable increase (in total supply), year over year,” said Christopher McGill, managing director of policy analysis at the American Gas Association, based in Washington, D.C.

“We may be slightly lower in terms of storage, but there is going to be more supply. I don’t see a deficit position. I see a strong position,” he said in an interview.

So, what could go wrong?

Well, the weather for one thing.

Hurricanes in the Gulf of Mexico could wreak havoc on offshore gas production and on-shore processing, as it did in the fall of 2005, leading to retail gas prices as high as $17 per 1,000 cubic feet, or 1 Mcf. At those prices, some consumers were facing winter gas bills in the hundreds of dollars.

No hurricanes have invaded the Gulf so far this year, and even if there are hurricanes this fall, the region accounts for only about 10 percent of U.S. gas production, half of what it did back in 2005. The bottom line: no severe hurricane-caused price spikes.

An early winter is another nightmare scenario. Storms and low temperatures before Thanksgiving over much of the nation would send gas prices higher. Already there are forecasts of a colder-than-normal fall leading into a colder-than-normal winter.

But so far, no one has forecast a winter as cold as last year. And not a winter that includes polar vortex outbreaks like those of last January, which pushed temperatures well below zero over large portions of the nation.

Still, consumers who heat their homes with natural gas will probably see at least slightly higher heating costs this winter.

Exactly how much higher will depend on the amount of natural gas in storage by Nov. 1, how much additional gas is flowing daily from the increasing number of shale gas wells, including those in Ohio and Pennsylvania, and how early winter weather arrives.

Those who are predicting another hard winter could be right, said Robert Ineson, the Houston-based managing director of North American gas for IHS, the global analytical and consulting company specializing in energy, economics, sustainability, and geopolitical risk management.

“If we have a normal winter and have 3.5 trillion cubic feet of gas in storage (less than a year ago), we will be OK, ” he said. “But if we have a winter like last winter, in which we began with 3.8 trillion cubic feet in storage, we will have trouble.”

Even if the forecasts are correct, IHS analysts don’t see major price spikes.

“There is an awful lot of risk around a cold winter, especially when we look at deficit (in storage),” Ineson said. “But we have lowered our price forecast, based on what we see in production.

“At the beginning of the year, our outlook was for $5 gas [for roughly 1,000 cubic feet]. But now our price outlook is something in the low-$4 range,” he said.

Another way to look at the impact of ever-increasing supplies from shale gas development is that before shale, the present storage situation would have created much higher market prices, Ineson said.

“We track pricing with storage reports. We have been well below average (in total storage) all year,” he said. The chart suggests that at these kinds of deficits, we would think the price would be up in the $6 dollar or $7 dollar (per Mcf) range.”

William O’Grady, executive vice president and chief market strategist at Confluence Investment Management in St. Louis, said his analytical team figures prices will probably range in the $4.30 to $4.50 per Mcf, “barring major Gulf hurricanes or a really early autumn.”

O’Grady dismissed the recent long-range temperature forecasts as “just climatology.”

“Once you get past 14 days, the correlation [with reality] is usually about 50 to 55 percent, or slightly better than a coin flip,” he said.

He does pay attention to one climate condition that can affect weather, an El Nino, a winds aloft condition created by very warm waters in the Pacific Ocean.

An El Nino keeps the polar vortex winds where they belong. Federal climate forecasters have predicted one for some time. But it has not materialized.

“Some say that if an El Nino does not form, it could be much colder in the Midwest and the Northeast,” O’Grady noted.

Your location is another factor that will affect how much you pay for gas this year. Living in Ohio is a plus.

Suppliers buying gas from wells in Ohio and Pennsylvania have seen wholesale cash prices as low as $1.95 for 1,000 cubic feet from pipelines in Pennsylvania. That’s about half the current benchmark price set on the New York Mercantile Exchange for gas available at the traditional southern hub of long-distance pipelines.

Whether those suppliers are willing to pass on the prices to consumers — or pocket the profits — is the question.

The Northeast Ohio Public Energy Council, or NOPEC, serves more than 120 communities through a contract with Next Era Energy Services, which does buy gas locally.

The NOPEC September-through-October price is $4.89 per Mcf for customers whose gas is delivered by Dominion East Ohio and 59 cents per 100 cubic feet, or Ccf, for customers in Columbia Gas of Ohio territory.

Those rates are below rates by other retail suppliers that are posted weekly by the Ohio Consumers’ Counsel on its website and by the state’s Apples to Apples Energy Choice website.

“We are buying in the $2.30 range,” said Chuck Keiper, NOPEC executive director. We are saving about 3 cents per Mcf in pipeline charges. There is a standard retail adder (additional cost) of 40-to-50 cents per Mcf, a fee for shrinkage in the pipeline, taxes, and a couple of additional charges, including storage fees.”

He said Next Era Energy was able to buy enough Ohio shale gas to meet 100 percent of summer demand from NOPEC customers. But Ohio gas will represent a smaller percentage in the winter because demand is so much higher.

The Council of Smaller Enterprises, or COSE, manages a gas program for businesses and their employees.  The COSE fixed rate is currently $5.25 per Mcf for 12 months, higher than NOPEC’s current rate, but still competitive.  Nicole Sticka, COSE’s director of energy programs, said she expects the rate to stay in place in the coming months.

While Ohio and Pennsylvania gas is so low-priced because the pipeline system to move it out of the region is still being built, national wholesale natural gas prices are running a bit higher than last year.

Gas contracts are bought and sold on the New York Mercantile Exchange, just as oil is.

NYMEX contract prices for September gas deliveries were set Aug. 27 at $3.96 for roughly 1 Mcf, up from $3.81 in August.  The NYMEX contract price in September 2013 was $3.56 per Mcf.

Currently NYMEX future contract prices through the winter are running between a low of $4 for October gas to a high of $4.25 for January gas.

While these prices only represent the sense of the market today, they are 50 cents to 75 cents higher than a year ago September through December actual contract prices, which ranged from $3.56 to $3.82 per Mcf. For the rest of the winter, those prices jumped well above $4, peaking in February at $5.56 per Mcf, thanks to the polar vortex and diminishing storage levels.

But even at those levels, the 2013 price increases were nothing like the spikes — and fears of shortages — that occurred during hard winters before shale gas, the AGA’s McGill points out.

In other words, last year’s winter, the coldest winter in 20 years, did not lead to draconian price spikes and a heating crisis.

“We surveyed the gas utilities,” McGill said. “When we asked them had they behaved differently because of the polar vortex, they said they had not. They may have used more of their assets, but they did not step out of bounds. It was not a situation where there was no gas available.

“They went to the market and bought more gas, and they probably bought it at prices close to what they had been paying for it.”