before the





February 28, 2001


Statement of Beth Campbell

Energy Information Administration

Department of Energy

before the

Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

U. S. House of Representatives


Natural Gas

February 28, 2001

Natural gas prices have been high this past winter by any measure. Residential consumers have faced large bills for delivered gas because of a combination of strong demand and high commodity prices. Spot prices were highest in late December and early January, corresponding with cold temperatures. Gas spot prices at Henry Hub in southern Louisiana reached as high as $10.53 per thousand cubic feet (Mcf) on December 29, 2000, but fell below $6 the week of February 19, 2001. The California market has been the location experiencing the highest spot prices.

The high national prices have been due to a number of factors, including record-setting demand for natural gas in 2000. At 22.7 Tcf, demand increased approximately 1 Tcf over the 1999 level. The year-to-year production increase was about 0.5 Tcf. The gap between consumption and production was closed by record levels of gas imports. Strong demand throughout 2000 meant that smaller quantities of natural gas were injected into storage for use during this winter's peak demand.

EIA projects that this winter spot wellhead natural gas prices will average about $6.10 per Mcf, more than two and one half times the price of the previous winter season (prices expressed in nominal dollars). Assuming normal winter weather and continued low underground storage levels, the annual average wellhead price in 2001 is projected to be about $5 per Mcf, an increase from the price of $3.60 per Mcf in 2000. In The Annual Energy Outlook 2001 natural gas consumption is expected to increase at an average rate of 2.3 percent per year for the next two decades, reaching a consumption level of 35 Tcf in 2020. EIA forecasts are contained in the Short-Term Energy Outlook and the Annual Energy Outlook 2001 and can be reviewed at

Mr. Chairman and Members of the Committee:

I appreciate the opportunity to appear before you today to discuss current and future natural gas prices and supplies in the United States.

The Energy Information Administration (EIA) is an autonomous statistical and analytical agency within the Department of Energy. We are charged with providing objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other government agencies, the U.S. Congress, and the public. We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers determine energy policy. Because we have an element of statutory independence with respect to the analyses that we publish, our views are strictly those of EIA. We do not speak for the Department, nor for any particular point of view with respect to energy policy, and our views should not be construed as representing those of the Department or the Administration.

The Committee has requested information about:

Each month EIA prepares information about natural gas supply, consumption, and prices derived from a variety of respondents and data sources. It also updates its Short-Term Energy Outlook, which contains quarterly projections through the next two calendar years, taking into account the latest developments in energy markets. The Annual Energy Outlook provides projections and analysis of natural gas consumption, supply, and prices through 2020. The projections in this testimony are from the Short-Term Energy Outlook February 2001 (STEO) and from the Annual Energy Outlook 2001 (AEO2001), published by EIA in December 2000. These projections are not meant to be exact predictions of the future, but represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. These EIA products are the basis of the information provided today.

Recent Natural Gas Prices

Natural gas prices are measured in several ways. There are spot market prices for immediate sales, long-term contract prices, and futures market prices. There are also price measurements made at different points in the supply system -- for example, at the wellhead or the citygate -- and at different market locations throughout the United States including the Gulf Coast, the U.S.-Canadian border, or the Northeast. Prices are also measured for different end-user groups -- residential, commercial, or industrial consumers and electric utilities. Our home bills reflect the price of the gas commodity purchased by local utilities or marketers in a mix of spot and long-term contracts, charges for shipment to the citygate by interstate and intrastate pipelines, storage charges, and charges for local distribution company services.

At the beginning of the supply chain, however, is the wellhead price. During 1998 and 1999 wellhead gas prices hovered around $2 per thousand cubic feet. Spot gas prices in the supply region, which are usually slightly higher than the composite wellhead price comprised of spot and longer-term sales prices, were generally below $3 per thousand cubic feet. Preliminary data for last summer indicate that overall wellhead prices were above $3.60 per thousand cubic feet (Figure 1) and spot prices averaged more than $4 per thousand cubic feet. Spot prices remained above $5 per thousand cubic feet in the fall. This was more than double the average spot price a year earlier, all prices in nominal dollars. In late November, gas spot prices (as measured at the Henry Hub in southern Louisiana -- a major pipeline interconnection and transshipment point) moved past $6 per thousand cubic feet, reaching as high as $10.53 on December 29, 2000. Since that point spot wellhead prices have fallen and were below $6 throughout the week of February 19, 2001. In addition to higher prices nationally, some regional markets have experienced particularly high prices. California has experienced the highest of the regional prices.

The sustained high national prices are due to a number of factors. The first of these is the strong demand for natural gas throughout 2000. Preliminary data for 2000 indicate that U.S. natural gas consumption reached a record 22.7 trillion cubic feet (Tcf), passing the previous high of 22.1 Tcf in 1972. The year-to-year increase in consumption from 1999 to 2000 was almost 1 Tcf. The high levels of demand the past year are related to the strong economy in 2000 and the return of cold winter weather in late 2000.

The industrial sector accounts for about 40 percent of U.S. natural gas demand, followed by the residential, electric utility, and commercial sectors. Natural gas consumption peaks in the winter due to residential and commercial space heating demand. Electric generator demand, however, peaks in the summer when gas-fueled generators are in greatest use. Another contributing factor for high prices of natural gas has been the high price of crude oil. Some industrial consumers and power generators are able to switch between natural gas and distillate fuel oil or residual fuel oil. The rise in natural gas prices has usually followed the rise in crude oil prices.

Production of natural gas also rose last year but was more modest than the consumption increase. Preliminary data indicate that the year-to-year increase, about 0.5 Tcf, resulted in production of approximately 19.1 Tcf. The gap between consumption and production in 2000 was closed by record levels of gas imports, primarily from Canada. Production appears to have increased throughout 2000 as the result of successful drilling and well completion. Gas drilling rig activity remains high and should result in increased production in 2001 and 2002.

Strong demand for gas in summer 2000 meant that smaller quantities of natural gas were injected into storage for use during this winter's peak demand. At the beginning of the winter heating season on November 1, 2000, natural gas in storage was about 7 percent below the average 5-year level (Figure 2). Data as of February 16, 2001 indicate that national storage levels are 33 percent below the average 5-year level and storage in the West region is 56 percent below its average 5-year level. Nonetheless, it now appears, presuming that withdrawals for the rest of February and March are average, that U.S. working gas storage will remain above 500 billion cubic feet at the end of March 2001. While end-of-season storage will be at or near a record low, there were concerns early in January 2001, when the temperatures had been coldest, that working gas storage would be depleted by the end of the heating season. This fear contributed to the price spikes at that time. Concerns about storage levels in the West region remain.

Regional storage and pipeline capacity are also part of the explanation for the regional differences in prices seen across the nation. Storage and pipeline capacity nationally have generally been adequate to meet most peak-day demands during recent winters. However, there are some points on the system where capacity constraint and bottleneck problems could arise during severe weather periods, if incremental demand increases beyond local capabilities. The California market and the Northeast region are examples of areas where concern about supplies or deliveries led to price competition for available supplies. By contrast, gas production increases in Rocky Mountain States during recent years have resulted in constraints for gas exiting the region. This has resulted in the region having the lowest average natural gas spot prices in the nation.

Supply problems in California for natural gas-fired electricity generation have helped to increase natural gas prices and have frequently caused interruptible customers to be cut off in that State. The situation in California is characterized by low natural gas storage, natural gas pipeline bottlenecks, high electricity demand, and low availability of alternative means of electricity generation, e.g., hydropower and nuclear electric power.

The Outlook for Natural Gas

Short-Term Outlook. EIA projects that this winter spot wellhead natural gas prices will average about $6.10 per thousand cubic feet, more than two and one half times the price of the previous winter season (all prices expressed in nominal dollars). Assuming normal weather and continued low underground storage levels, the annual average wellhead price in 2001 is projected to be about $5 per thousand cubic feet (Figure 3). In 2002, we expect the storage situation to improve, leading to a decrease in the average annual wellhead price to $4.50 per thousand cubic feet. Domestic natural gas production for 2001 and 2002 is expected to rise as production responds to the high rates of drilling experienced over the past year. Production is projected to increase by 5.4 percent in 2001 and 2.5 percent in 2002.

The Outlook for Natural Gas to 2020. AEO2001 provides an integrated projection of U.S. energy market trends for the next two decades on an annual basis. Natural gas consumption is expected to increase at an average rate of 2.3 percent per year. Increases are expected in all sectors, but the most rapid growth is for electricity generation, where natural gas use (excluding cogenerators) is projected to grow from 3.8 to 11.3 trillion cubic feet between 1999 and 2020 (Figure 4). Unlike oil, domestic natural gas production, with its larger and more accessible resource base, is expected to increase from 18.7 trillion cubic feet in 1999 to 29.0 trillion cubic feet in 2020 to meet growing domestic demand. Increased production comes primarily from lower- 48 onshore conventional nonassociated sources, although onshore unconventional production is expected to increase at a faster rate than other sources. In order to fill the gap between domestic production and consumption, net natural gas imports are expected to increase from 3.4 trillion cubic feet in 1999 to 5.8 trillion cubic feet in 2020. Net liquefied natural gas imports are projected to increase from 0.1 to 0.7 trillion cubic feet by 2020; however, most natural gas imports are by pipeline from Canada. In EIA's reference case, average natural gas wellhead prices are projected to eventually return to the historical trend and gradually increase thereafter, driven by natural gas demand growth, particularly in electric generation, and the natural progression of the discovery process from larger and more profitable fields to smaller, more costly ones. Average lower-48 wellhead prices are forecast to increase at an annual rate of 2.0 percent from 1999 levels. Because of expected improvements in transmission and distribution efficiencies, average delivered prices are expected to increase by only 0.5 percent annually.

Electricity consumption overall is projected to grow by 1.8 percent per year through 2020. Generation from both natural gas and coal is projected to increase through 2020 to meet growing demand for electricity and offset the decline in nuclear power expected from retirements of some existing facilities. Assumptions about electricity industry restructuring, such as higher cost of capital and shorter financial life of plants, tend to favor the less capital-intensive and more efficient natural gas generation technologies. The natural gas share of total generation is expected to increase from 16 to 36 percent between 1999 and 2020 but coal is expected to continue to be the leading fuel for electricity generation.

The Future for Adequate Supplies of Natural Gas

EIA does not propose or advocate any particular policies and programs. We do note that, in general, there are a wide range of policies that could alter the energy future described in the AEO2001. In this section, EIA presents a summary of recent changes in energy markets, policies, and technologies that affected natural gas consumption and supply and also summarizes the assumptions used in the AEO2001 which contribute to the forecast of balanced growth in natural gas consumption and supply. These provide indications of the kinds of policies and programs which could contribute to adequate supplies of natural gas.

Between 1986, when gas consumption had fallen to 16.2 Tcf and the new peak in gas consumption last year, a number of important changes in energy markets, policies, and technologies occurred. These included:

Assumptions underlying the forecasts for natural gas in the AEO2001 include the following:

Together these overviews of past changes and assumed future changes indicate the variety of factors which could influence energy supply and demand in the future.

Conclusion. In the near term, we expect annual average natural gas prices to be higher in 2001 than in 2000 but to decline in 2002. Storage volumes of natural gas are low and replacement of gas in storage will contribute to strong summer 2001 demand and higher gas prices that will make storage for next winter costly. Thank you, Mr. Chairman and members of the Subcommittee. I will be happy to answer any questions you may have.

Source: EIA, Natural Gas Monthly

Source: EIA, Natural Gas Monthly; Short-Term Energy Outlook, February 2001.

Source: EIA, Natural Gas Monthly; Short-Term Energy Outlook, February 2001

Source: EIA, Annual Energy Outlook 2001.