Over the last few years, it has been clear that the electric power market is extremely close to using all available natural gas supply during the height of summer demand. During peak demand days, gas prices at the citygate have soared into new territory and a few areas have suffered brownouts. Several major lawsuits erupted between suppliers, marketers and municipalities that were on the short end of the stick in summer 1998 and 1999. One reason is that additions of new power capacity have dropped fairly steadily during the last 15 years, but power companies are now beginning to reverse that trend. Indeed, during the next 12 months, some 27,000 megawatts of natural-gas-fired capacity are planned to be added to the U.S. power system, says analyst Marshall Adkins of Raymond James & Associates in Houston. This should translate into gas consumption rising by 1.5 billion cubic feet per day, during those hottest summer days when gas-fired peaking units are running at full capacity 24 hours a day to meet air conditioning demand. This represents about a 2.5% increase in daily gas use, if one assumes average yearly consumption of 60 billion cubic feet per day. Power companies may ramp up their gas-fired generating capacity, but is there enough gas supply to fuel those new plants? The problem is that U.S. gas production was relatively flat in 1997 and 1998, as the U.S. gas rig count fell to the low 600 range, and production fell in 1999, when the rig count fell to 450. That has affected gas storage. What's more, it looks like there may not be enough gas available for demand this summer. "If we look at year-to-year gas storage differentials, [Minerals Management Service offshore and federal lease] production data or even state production date, all three sources suggest a year-to-year production decline of 4% to 6% in late 1999," Adkins says. While the rig count has steadily crept upward from its disastrous lows in 1999, "we do not believe that meaningful U.S. gas production increases will be seen until late 2000, [after the summer air conditioning season]," Adkins says in a recent report. He thinks the U.S. gas rig count needs to be around 675 in order to make gas production begin increasing. However, that number has not been yet reached. In February, the U.S. gas rig count was averaging around 620, versus about 450 the prior year. "On a summer-to-summer basis, gas production in the summer of 2000 should be down approximately 1 billion cubic feet, or 2% below the average seen in the summer of 1999." This shortfall gives Adkins confidence in his forecast of $3 per thousand cubic feet for 2000. -Leslie Haines
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