Why is a warmer winter in the Northeast not likely to hit natural gas demand?

If predictions hold, the Northeast may not have to hibernate through bone-chilling cold like it did last winter.

The latest forecast from the National Oceanic and Atmospheric Administration shows temperatures are expected to be warmer than last year, when a deep freeze forced people to crank up the heat, drew down natural gas storage inventories and caused prices to spike.

Of course, predicting the weather is a tricky business.

Even so, while natural gas demand spiked last year, overall demand for the commodity this winter is not likely to take a hit, analysts said.

Coal and nuclear plant retirements

“Last winter was rare,” said Gabe Harris, senior analyst of North American gas for Wood Mackenzie. “There is a 97 percent chance that it will not be as cold this year.”

Several nuclear and coal plants have retired since last winter, which could mean about 1 billion cubic feet per day (Bcf/d) of extra natural gas demand, Mr. Harris noted.

Between now and the end of 2015, more than 20 gigawatts of power plant capacity is slated for retirement in the face of pending environmental restrictions from the U.S. Environmental Protection Agency and greater competition from natural gas, Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas, wrote in a recent report.

Those plant retirements are “an important turning point for structural demand growth, with electric generation increasingly dependent on natural gas,” Ms. Viswanath said.

The retirements should contribute to a 1.75 Bcf/d year-on-year increase in electric power demand in 2015 and another 0.5 Bcf/d in 2016, according to Ms. Viswanath.

Strong supplies

Meanwhile, natural gas supplies are up.

The Marcellus Shale alone is expected to produce a record 16 Bcf/d this month, according to the U.S. Energy Information Administration.

Pipeline companies have worked to take gas from the Marcellus and Utica shales out of the region. 

“Between now and 2016 more than 15 Bcf/d of new pipeline capacity will be built to support the continued Appalachian basin supply growth,” Ms Viswanath said. 

The first wave of the new pipelines are expected to come online in November and December, adding about 3.5 Bcf/d of transportation capacity, and it will enable current stranded gas supplies to reach the market, she said.

“As a result of the forthcoming take-away capacity, we expect that domestic production will increase 4.25 Bcf/d over the winter compared to year-ago levels,” Ms. Viswanath said. 

Still, areas like New England will likely face continued challenges.

“More residential customers are switching to natural gas because of the price difference, and there haven’t been new pipelines built in the region for many years,” said Mihoko Manabe, senior vice president for Moody’s Investor Service. “They need more now.”

Midstream companies have responded.

Houston-based Spectra Energy proposed its Access Northeast project to supply up to 1 Bcf/d to power plants and heating customers. Houston-based Kinder Morgan is seeking to build the Northeast Energy Direct Project to send up to 2.2 Bcf/d to the region. Both projects are slated to be completed in 2018.

“But even if they go forward, they alone are not enough to meet forecasted capacity needed in New England, and they also are going to take a few years to build,” Ms. Manabe said.

A warmer winter?

Forecast temperatures are much warmer than last winter east of the Rocky Mountains with the Northeast, Midwest, and South about 11 percent, 16 percent, and 12 percent warmer, respectively, according to the EIA’s Short-Term Energy and Winter Fuels Outlook.

Average household expenditures for homes heating primarily with natural gas — which now accounts for about one-half of U.S. households — will total $649 this winter, a $31 decline from last winter's average, EIA said.

Homes using electric heat are expected to spend $938, about $17 less.

Homes using propane or heating oil have higher expenditures on average — $1,724 and $1,992, respectively — than those using natural gas and electricity, but still lower — $652 less and $36 less, respectively — compared to last year.

Still, weather predictions are difficult, EIA noted.

If predictions are wrong and the winter is 10 percent colder than last year instead, heating costs could average 6 percent higher than last year for households heating with natural gas and 2 percent higher for those using electricity.

Costs for propane and heating oil are still expected to be lower than last winter, even in the 10 percent colder scenario, as propane and heating oil prices are lower than last winter. In the colder scenario, propane-heated households still spend 15 percent less and heating oil households spend 5 percent less than last winter, EIA said.

Stephanie Ritenbaugh: sritenbaugh@post-gazette.com or 412-263-4910

First Published October 14, 2014 12:00 AM

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