There never may have been a more prominent cheerleader for winter gloom than the natural gas industry of 2012.
Nothing would make it happier, it seems, than dark clouds and an Arctic chill to keep Americans indoors.
That’s because a warm winter for a second straight year could be catastrophic, cutting demand for natural gas-consuming heat and electricity and presenting serious challenges for some energy companies.
But another warm winter may be on the horizon, according to government projections.
“Some of those with more strained balance sheets probably can’t sustain another year of that, unless they’ve hedged significantly,” Sullivan added, referring to the practice of securing contracts for future natural gas production as insurance against sharp price declines.
A year ago, soaring natural gas production combined with a warm winter created a surplus that sent prices to their lowest levels in a decade. Some companies responded by fleeing their gas-drilling efforts while relying on loans to keep business running. It’s uncertain whether those companies, notably Chesapeake Energy Corp., can sustain another such year, said Phil Weiss, an analyst for Argus Research Group.
A warm winter is again a possibility, particularly in the Northeast, where the potential for wintertime natural gas demand is greatest. The National Oceanic and Atmospheric Administration predicts a roughly equal likelihood for a cold, normal or warm winter in that region.
“I think all that we’re kind of expecting is that it’s cooler than last winter, but that isn’t actually saying all that much,” Halpert said, because last winter was unusually warm.
Because natural gas production was booming a year ago, large surpluses remained in storage facilities after the winter, creating a lingering glut of gas even as companies started to cut back on production.
That oversupply pushed down natural gas prices but also raised interest in using the cheap fuel.
Electric power generators switched from coal to gas, where possible, to take advantage of lower fuel costs.
Industrial players including Dow Chemical and Chevron Phillips Chemical announced new multibillion-dollar plants that would benefit from the low price of natural gas – which they use both for fuel and as a raw material for their products.
But another warm winter, even if it lowered prices further, probably wouldn’t prompt many more big moves to natural gas by power companies or manufacturers – leaving gas producers with few sources of new demand to cut into ballooning resources, Sullivan said.
“We’ve more or less maxed out the switching ability,” Sullivan said. “So, if we have another warm winter, you’re not going to be able to take that much storage overage out like we did in 2012.”
And while companies have attempted to cut natural gas drilling, the U.S. Energy Information Administration reportedlast week that production still grew 5 percent in the first nine months of the year compared with the same period in 2011, when drillers were expanding activities because of high prices.
Demand has not kept pace with that growth. Drillers produced 22.1 trillion cubic feet in the first nine months of the year, while the nation consumed 18.8 trillion cubic feet.
Glut of gas
That may leave a growing glut of gas, as even slowing rig activity likely will create new gas production and fill up storage facilities, said Mark Hanson, an analyst for Morningstar. That’s because some rigs, although scheduled to come offline, are still finishing work, while recently completed wells will continue to add jolts of gas into the national supply before tapering off after rig activity declines in earnest, Hanson said.
“If you have another warm winter, my guess is your gas production probably doesn’t flatten out enough, so you’re probably still faced with a situation of over-storage,” Hanson said.
Natural gas in underground storage has surpassed its 2011 peak of 3.85 trillion cubic feet at the end of November. This year’s storage total moved above that mark for five consecutive weeks, surpassing 3.9 trillion cubic feet, according to the U.S. Energy Information Administration. Natural gas in storage totaled 3.8 trillion cubic feet at the end of November, despite declining production.
With weak demand for natural gas, prices probably will plummet again, said Neal Dingmann, an analyst with SunTrust Robinson-Humphrey.
Natural gas closed Friday at $3.551 per million British thermal units in New York Mercantile Exchange trading, down for the week but well up from the low of around $1.90 in April.
Standard & Poor’s forecast last week that U.S. natural gas prices will remain below $4 and may decline in 2013 because of continuing production growth and limited opportunities for new demand.
Plenty of liquids
Dingmann said there also may be a glut of natural gas liquids such as propane and ethane, which helped sustain producers when natural gas prices collapsed. Producers’ rush on liquids resulted in a surplus. A warm winter would weaken demand for liquids as well as dry gas, putting a squeeze on companies that had relied on liquids to buoy balance sheets, he said.
Weiss said Chesapeake Energy will be under especially strong pressure if warm conditions prevail. Natural gas still accounts for 79 percent of its total production, despite efforts to reduce exposure to the weakened resource and pursue oil and natural gas liquids instead.
Chesapeake, the nation’s second-largest natural gas producer after Exxon Mobil Corp., was so affected by low prices a year ago that it fell short of cash and has taken on billions of dollars in added debt to fund drilling for oil and natural gas liquids as executives attempt to reposition the company. But Chesapeake’s debt, combined with its lack of price hedges for the winter, could leave it in serious trouble, Weiss said.
“The company that is most at risk as gas prices go the other way is Chesapeake,” he said.
Still, a warm winter isn’t a certainty, so natural gas producers still can hope for frigid conditions.