Lessons from the Short Term Energy Outlook


The US EIA Short Term Outlook released October 13 2010 expects total natural gas consumption to increase by 4.6 percent and 0.1 percent in 2010 and 2011, respectively (Total U.S. Natural Gas Consumption Growth Chart). Fuel demand for power generation is expected grew 7.9% through August 2010 compared to a year ago driven by more cooling degree days and thus high A/C use this past summer.  Industrial natural gas consumption is forecast to grow 7.4 percent in 2010, driven by the projected 6.7 percent increase in the natural-gas-weighted industrial production index.

Because EIA forecasts are weather normalized, 2011 growth forecast is slightly lower than expected 2010 growth given the warmer than normal summer experienced in 2010. As a result, the projected 0.1 percent increase in total natural gas consumption in 2011 is derived from a 1-percent increase in natural gas consumption, offset by a 1-percent decline in natural gas demand for power generation.

The big story on the power side of the SEO was higher summer temperatures and thus more electricity demand for air conditioning. Cooling degree-days in the east during June, July, and August were up 26 percent (in the South Atlantic region) to 46 percent (in New England) higher than normal (U.S. Summer Cooling Degree-Days Chart).  Compare that to 2009 in the East overall when cooling degree-days were 7 percent lower than normal. This big year-over-year increase pushed up total 2010 consumption of electricity by 5 percent over last year’s level. Total consumption is expected to fall slightly in 2011 as forecast temperatures return to near-normal levels (U.S. Total Electricity Consumption Chart).

U.S. Power Generation Mix. Power generation is expected to be 4.4 percent higher in 2010 than the year before. The fuel mix today is 47.0 percent coal; 22.5 percent from natural-gas compared to 45.9 percent and 22.0 percent, respectively in 2009.  EIA projects 2011 power generation will grow by only 0.4 percent weather normalized with coal mix share declining to 45% and natural gas share to 21.3% as nuclear power output and renewable energy including hydro grow 1.4 percent and 13 percent respectively. (Power Generation Portfolio Mix)

Net power generation from renewable energy for the rolling twelve months ending in June 2010 was up 12.1% to 150,417 thousand mWh compared to 134, 162 the prior year. Compare that to coal net generation which fell 2.3% to 1,817,457 thousand mWh from 1,860,156 thousand mWh in 2009.  Natural gas net generation increased 5.6% to 941,967 thousand mWh from 889,804 thousand mWh in 2009. (Net Generation by Energy Source)


U.S. Natural Gas Prices. Henry Hub spot price averaged $3.68 per MMBtu on October 13 2010 as this is written. (Henry Hub Natural Gas Price Chart). EIA expects gas prices to rise to $4.68 per MMBtu by January as space-heating demand increases this winter. EIA has revised its natural gas price forecast downward through 2011 with $4.16 per MMBtu for Q4:2010 based on several weeks of strong inventory builds. Prices for 2011 are expected to be $4.58 per MMBtu, due to a stronger domestic production forecast.

U.S. Electricity Retail Prices. Average U.S. residential retail power prices fell 1 percent during the first half of 2010 compared with the same period in 2009 but higher demand is expected to push prices back up by 1.5 percent year-over-year during the second half of 2010.  That means that 2011 power prices can be expected to rise by 1.4 percent as those higher fuel costs are pushed through in rates and fuel clauses in 2011. (U.S. Residential Electricity Prices Chart).

Rig Counts

Baker Hughes Weekly Rig Count is Up. The Baker Hughes Inc. (BHI) Rig Count Report shows the U.S. rig count overall rising with vertical drilling rigs up 6 to 529 and horizontal/directional rig count up 16 to 1,142.  Horizontal drilling is the technique used for unconventional oil and gas production—the fastest category of energy production.

Rigs in the U.S. totaled 1,671 for the week ended October 8, 2010 up 12 rigs week over week and the highest level for 2010 to date. The current US rig count is 91% higher from the 2009 low of 876 (June 12, 2009) and better than prior-year level of 1,041. It rose to a 22-year high in 2008, peaking to 2,031 in the weeks ending August 29 and September 12. Rigs engaged in land operations climbed by 10 rigs to 1,634, while inland waters and offshore activity expanded by a rig each to 17 and 20, respectively.

By category rig counts were:

  • Natural gas rig count grew 9 rigs from the previous week to 971 compared to the year ago 726 active natural gas rigs.  The recession cut the rig count to a 7-year low of 665 in July 2009 from a peak of 1,606 in 2008.
  • Oil rig count was up for the 10th of the last 12 weeks by 3 rigs to 690 compared to 305 a year ago and a low of 179 in June 209.
  • Geothermal rig count unchanged at 10 from the previous week.

The Obama Administration announced it was lifting the moratorium on drilling in the Gulf of Mexico bowing to growing pressure from Gulf coast legislators and governors that the freeze was costing 12,000 to 20,000 direct jobs in the energy industry.  The lifting of the moratorium was coupled with new regulations that industry insiders say has the practical effect of slowing down projects and driving up costs for compliance.  The rig count number reflect that uncertainty with more activity focused onshore with horizontal drilling in unconventional oil and gas plays despite lower gas prices.

The Growing Market for American Coal is in Exports

The global energy message to America seems to be if the US isn’t going to put its coal resources to work at home the rest of the work will be glad to buy them from us in exports.  US coal exports averaged 3.4 percent of production in 2009, but net coal exports are projected grow by 58 percent in 2010, and then decline by 17 percent in 2011 according to US EIA.  Metallurgical coal exports used for steel production doubled through June 2010 compared with 2009. Metallurgical coal’s share of total coal exports has grown from 52 percent in 2008 to 74 percent forecast for 2010. EIA projects coal imports will decline 17 percent in 2010 but recover 37 percent in 2011, but annual import tonnage (26 million short tons) is far below the 2005-through-2008 average of 34 million short tons.

U.S. Coal Supply. Coal production for the first half of 2010 fell by 3 percent despite a 5 percent increase in U.S. coal consumption as utilities drew down coal pile inventories and pushed off costs. (U.S. Electric Power Sector Coal Stocks Chart)  Since inventory drawdowns only work once coal production is expected to increases 1 percent in the second half of 2010, and another 1 in 2011 (U.S. Annual Coal Production Chart).

U.S. Coal Prices. Utility coal prices rose 1.3 percent through June 2010 compared year over year due to long-term coal contract terms, higher transport costs, increased consumption, and increases in spot coal prices. Average delivered coal prices to utilities are $2.26 per MMBtu in 2010, and declining slowly to an average of $2.23 per MMBtu in 2011.

So what?

Weather changes everything in the energy business as warmer summer temperatures in some regions showed us again this year to date.

Renewable energy additions were the fastest growing segment of the power generation mix but they made practically no difference in the overall fuel mix with coal and natural gas playing their traditional roles as baseload and load following fuels of choice.

Nuclear capacity factors remained stellar but the capacity creep in additional output from retrofits is not enough to make a material difference longer term as the source of clean baseload growth unless we actually build new nuclear power plants.

Coal export growth is a signal that if America does not use its low-cost coal resources at home they will surely be used in the export trade.  Either way the emissions impact will be the same except the US will pay higher prices NOT to use coal and higher prices to achieve the emissions reduction goals.

The phenomenal growth in unconventional oil and gas production is transforming the energy sector at home and around the world as the rig count growth shows despite the Gulf Coast drilling moratorium and low gas prices especially when prices for oil and liquids are high enough to keep producers busy switching between products in the same plays.