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|Overview of U.S. Legislation and Regulations Affecting Offshore Natural Gas and Oil Activity|
|Changes in U.S. Natural Gas Transportation Infrastructure in 2004|
|Major Legislative and Regulatory Actions (1935 - 2004)|
|U.S. LNG Markets and Uses: June 2004|
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Overview: Thursday, July 26, 2007 (next release 2:00 p.m. on August 2, 2007)
Since Wednesday, July 18, natural gas spot prices have decreased at all market locations in the Lower 48 States, with the exception of a few points in the Rockies. For the week (Wednesday-Wednesday), prices at the Henry Hub decreased by about 11 percent to $5.57 per MMBtu. Yesterday (July 25), the price of the NYMEX futures contract for August delivery at the Henry Hub settled at $5.925 per MMBtu in its third to last day of trading, decreasing by a net of $0.60 or about 9 percent since last Wednesday (July 18). The August 2007 contract reversed a 3-day downward price trend in the final day of the report week, increasing 6.2 cents per MMBtu on Wednesday, July 25. Natural gas in storage was 2,763 Bcf as of July 20, which is 16.1 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil rose $0.71 per barrel or about 1 percent on the week to $75.74 per barrel or $13.06 per MMBtu. The crude oil price reached $75.90 per barrel on July 19, which was the highest crude oil price since August 9, 2006, when the WTI traded at $76.28 per barrel. Furthermore, it was $1.15 per barrel lower than the all-time high of $77.05 per barrel recorded on August 7, 2006.
Mild summer weather in the densely populated Northeast and Midwest and no supply interruptions led to natural gas spot price decreases at virtually all market locations in the Lower 48 States during the report week. The Edison Electric Institute (EEI) reported that U.S. electricity demand for the week ending July 21 decreased by 1 percent from the level of the prior week and was 8.7 percent less than during the same week last year. According to EEI, domestic utilities delivered 87, 961 gigawatt hours (GWh) during the week ended July 21, which was significantly lower than the record-setting deliveries of 96,314 GWh for the week ended June 22, 2006, that led to an unusual mid-summer net withdrawal of gas from storage of 7 Bcf for the week roughly coinciding with the EEI report. Thus, the continuing lack of significant cooling demand mitigated the increase in crude oil prices this week, which reached levels close to historical highs. Price decreases on the week varied widely, ranging between 33 cents and $1.93 per MMBtu. Prices at the Henry Hub decreased 67 cents or about 11 percent to $5.57 per MMBtu since last Wednesday, while prices at other market locations in Louisiana decreased by an average of 77 cents per MMBtu. Major consuming areas of the Northeast and the Midwest recorded price decreases on the week of 76 and 60 cents per MMBtu, respectively, reaching regional averages of $6.02 and $5.68 per MMBtu. The regional average price in California decreased by 43 cents per MMBtu to $5.53 per MMBtu. Prices at several locations in the Rocky Mountain region increased on the week despite pipeline maintenance projects that constricted some of the capacity available to move the natural gas to consuming areas. The price increases in the Rockies ranged between 24 and 63 cents per MMBtu, or 7 and 21 percent. While the regional average in the Rockies was $4.25 per MMBtu as of yesterday, the lowest in the Lower 48 States, the basis differential with other trading regions has decreased significantly over the past few weeks. Currently, the Northeast is the highest-priced regional average at $6.02 per MMBtu, or $1.77 per MMBtu higher than the Rockies’ average – significantly lower than the roughly $4 differential recorded in mid-June.
At the NYMEX, the price of the futures contract for August delivery at the Henry Hub decreased $0.60 per MMBtu or about 9 percent since last Wednesday to $5.925 per MMBtu in its third to last day of trading yesterday (July 25). The August 2007 contract has declined about 73 cents or 11 percent per MMBtu from its settlement price on June 28, its first full day of trading as the near-month contract. After trading above $6 per MMBtu throughout its tenure as the near-month contract, the August 2007 contract slipped to $5.863 per MMBtu on Tuesday, July 24, the first time a near-month contract reached a below-$6 price since December 2006. Similarly, all other futures contracts through the next 12 months (July 2008) decreased by an average of about 23 cents per MMBtu during this past week. Futures contract prices for each month through the remaining months of 2007 and through February 2008 exceed the current Henry Hub spot price by differences between $0.36 and $3.07 per MMBtu, with the difference for each successive month larger that that of the preceding month. In line with the recent decreases, as well as the general decreasing trend in the futures prices evident since at least mid-June, the 12-month strip is currently trading 96.2 cents lower than 1 year ago, when the average price of contracts for delivery during the following 12 months (August 2006-July 2007) traded at $8.546 or 11.3 percent higher than yesterday’s price for the strip (August 2007-July 2008) of $7.584 per MMBtu.
Recent Natural Gas Market Data
Working gas in storage totaled 2,763 Bcf as of Friday, July 20, according to EIA’s Weekly Natural Gas Storage Report. Working gas inventories are roughly 16 percent above the 5-year average for the report week and slightly higher (0.2 percent) than last year’s level of 2,757 Bcf (see Storage Figure). This week’s storage report indicates that current inventories have surpassed last year’s storage level for the first time since January 27, 2007. The net addition of 71 Bcf, which includes a reclassification of 7 Bcf from base to working gas, sharply contrasts with last year’s injection of 2 Bcf and even without the reclassification volume would be about 23 percent higher than the 5-year average injection of 52 Bcf. This week’s sizeable net injection was driven largely by a lack of space cooling demand across the Lower 48 States. During the week ended July 19, the National Weather Service reported temperatures for the entire Lower 48 that were 4 percent cooler than normal, as measured by the cooling degree-days (CDDs) (see Temperature Maps). Temperatures in six out of nine Census Divisions were between 2 and 30 percent cooler than normal. Compared with the comparable report week last year, temperatures were more than 30 percent cooler, with each Census Division recording CDDs lower than last year’s. With about 14 weeks left in the traditional heating season, should net injections occur at a rate equal to the 5-year minima, total inventories at the beginning of the heating season will reach roughly 3,400 Bcf. This volume is less than 2 percent below last year’s level of 3,452 Bcf, which is the highest level since 1990.
Other Market Trends:
New Use for Stranded Natural Gas: A U.S. Department of Energy (DOE) funded project is turning “stranded” natural gas at marginal or low-production oil fields into fuel for distributed electric power. The National Energy Technology Laboratory (NETL) announced on July 24 that the previously thought uneconomic stranded gas could be used to boost domestic oil production by about 28 million barrels per year within the next 10 years. Researchers at NETL developed a method of using the stranded gas as fuel for distributed generation power units at marginal well sites in California. Currently, four field demonstrations are being conducted with fuels of varying energy contents and quality. Three of the demonstrations have shown success so far: Demonstrations using high-Btu gas, medium-Btu gas, and "harsh" gas have been tested and have been successful. The fourth demonstration using ultralow-Btu gas, which has as little as 15 Btu per standard cubic foot, did not prove successful. Stranded gas is natural gas that is uneconomic to produce for one or more reasons. Normally, there are three ways to deal with stranded natural gas: (1) venting or flaring the gas, but this contributes to air pollution without any beneficial offsets from the gas; (2) using electrical energy to re-inject the gas, which incurs significant extra costs; and (3) shutting down oil production in marginal fields, which leaves valuable oil in the ground.
MMS Issues Final Notice for Western Gulf Lease Sale 204: The Minerals Management Service (MMS) issued a final notice for Lease Sale 204 on July 20, 2007. The final notice includes several new provisions for the sale, including new administrative planning area boundaries, an increased deepwater royalty rate, terms for extensions of deep (below 25,000 feet true vertical depth subsea) drilling leases, and changes to deepwater royalty suspension prices. According to the notice, MMS will open and publicly announce bids received on August 22, 2007, which is its first lease sale of the 2007-2012 Outer Continental Shelf (OCS) Oil and Natural Gas leasing program. MMS estimates that Sale 204 could result in the recovery of 242 to 423 millions barrels of oil and 1.64 to 2.64 trillion cubic feet of natural gas. The sale includes 3,338 unleased blocks in the Western Gulf of Mexico OCS covering a total of approximately 18 million acres of land in Federal waters offshore Texas, with water depths of greater than 4 meters (13 feet) to about 3,425 meters (11,237 feet). Proposed lease areas range from 9 to 250 miles offshore.
Natural Gas Transportation Update:
<![if !supportLists]>● <![endif]>On Monday, July 23, 2007, Northern Natural Gas reactivated eight platforms that are part of the Matagorda Offshore Pipeline System (MOPS). In an effort to disconnect and abandon the Matagorda Island 686C compression platform, the 24-inch diameter pipeline was shut down on June 12 between Mustang Island 758 and the onshore Tivoli, Texas, processing plant. A pig launch is scheduled for July 30 so that accumulated liquids can be cleared from the MOPS mainline system. All of the eight manned platforms will remain online to facilitate the pigging activity. The pig is expected to be received at the Tivoli Plant on or before August 3 and then it is expected to take a minimum of 3 days to process the liquids. During the liquids processing, all platform production will be shut-in. Once the processing has been completed, the MOPS system will return to normal operations. MOPS is expected to become fully operational for gas day August 7 and nominations will be accepted at that time for all platforms.
<![if !supportLists]>● <![endif]>Kern River Gas Transportation Company released a critical notice on July 19 reminding shippers and operators to stay on rate during the repair or replacement of one of the Goodsprings compressor station units. Furthermore, on July 25, Kern River augmented the earlier notice, stating that the extent of the damage at the Goodsprings compressor station unit makes it impossible to be repaired. Instead the pipeline announced that the unit needed to be replaced and that it is working with a vendor who has been able to acquire a replacement that is in its final manufacturing stages. Kern River is anticipating that the replacement unit will be installed and full service restored by mid-August 2007.
<![if !supportLists]>● <![endif]>Transcontinental Gas Pipe Line Corporation announced on July 23 that a leak was discovered at its North Padre Island processing facility located in Texas, leading to production shut-ins upstream of the facility. According to the pipeline, the leak had been repaired by July 24.
<![if !supportLists]>● <![endif]>El Paso Natural Gas Company announced on July 23 that it had reserved 350,000 decatherms per day of firm mainline capacity on the south mainline. El Paso stated that it was reserving the capacity for a proposed south system expansion project. The project is expected to bring gas supplies from the international border of Mexico for delivery to existing and future markets attached to the El Paso system. The capacity reserved is located on south mainline from Waha and Keystone to the Ehrenberg delivery point in California. The anticipated in-service date of the new facilities is November 1, 2011.