By Gordon Boyd
Energy consumers concerned about cost
controls for their businesses should look
ahead to 2013 much as they did a year ago
at 2012.
Relatively low prices for natural gas,
coupled with economic recovery, could lead
to modestly higher costs, so for those who
value stability, and predictability, fixed pricing
is pretty attractive for both electricity
and natural gas.
During 2012, natural gas prices, which control electricity prices in New York, performed roughly as our late-2011 forecast predicted. They are a bit but not much higher now, thanks to the economic recovery and also to drillers curtailing production due to the difficulty of recovering their costs at $3.50 per decatherm.
This is evidenced by the decline in drilling rigs from more than 800 a year ago to about 400 today, while record amounts of gas is in storage awaiting winter withdrawals. Meanwhile the price of gas, which was at about $3.35 last December, declined to less than $2 in late spring, before recovering to its present level.
The net of it is that consumers who found themselves shopping between April and August did very well if they locked in fixed pricing then. Those who missed that window, don’t despair, as prices are still a fraction of what we experienced in 2008 (more than $12), and futures out to 2015 are barely above $4.
Last year, in a similar market, we cautioned that exogenous factors like trouble in the Middle East, an easing of European financial volatility, or unforeseen events in Asia could force prices back up.
This year, we note that most of these things have happened and neither has had much impact on North American markets. Long term, we see corporate planners and small businesses alike making significant investments based on long term, stable and relatively low natural gas pricing. On the corporate side, U.S. and Canadian firms are competing to install capacity for exporting natural gas in liquid form to Asia, where demand is high in Japan (due to nuclear power decommissioning) and China.
A South African firm has announced plans for a $14 billion refinery on the Gulf Coast to convert natural gas to diesel for transportation fuel. Companies like Dow Chemical are concerned about exports pushing up gas prices, as they have made major commitments to plastics manufacturing where natural gas is not a fuel but a key raw material.
Smaller players are looking at natural gas as transportation fuel by converting vehicle fleets. Federal Express, UPS, the U.S. Postal Service, passenger buses and others have begun looking closely at the attractive payback from replacing conventional diesel with natural gas. Locally, American Natural Gas, a joint venture including D. A. Collins Companies and Keeler Motor Car Co., among others, is developing NG vehicle fueling infrastructure, a key component of this sea change.
If it appears, after the above points, that the energy outlook for 2013 is all about natural gas, you have reached the correct conclusion. Electricity, which is where most business’s energy dollars are spent, is dependent on natural gas as the marginal fuel in New York state’s generation mix. When natural gas prices jump, electricity says “how high?”
So plan your year as you did last year. Looking over my 2012 Outlook published December 2011, many of my observations and recommendations held up, and some are worth repeating.
Value stability, and don’t try to be a cowboy in this market. Supplies are abundant. The bulls are circling but the effect will be very much at the margins. Now that natural gas production has become more land-based thanks to shale sources and horizontal wells, even hurricanes are not as much of a concern as they were before 2008.
Finally, we doubt these trends will be affected by New York state’s moratorium on hydrofracking, at least from a market perspective. It won’t have much impact on the macroeconomics at this point. Every other state that can do it, including Canada, is doing it, and that is contributing to the glut in the market and the low and stable prices looking ahead. Meanwhile, pipeline companies are seeking customers and approvals for additional gas to be piped into eastern New York, which will keep transport costs down. From the energy sector at least, 2013 looks like a Happy New Year.