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Gold/Mining/Energy : Big Dog's Boom Boom Room

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To: lonesomemoose1 who wrote (17824)	2/4/2003 4:48:50 PM
From: tommycanuck	Read Replies (5) of 206184

I am like most everyone else on the thread regarding the situation with NG over the forseeable future...but like everyone else I also participated in the last run that got blindsided by the drop in demand caused by a number of factors that hit us from basically out of the blue. In looking at this situation today, I wonder to myself what am I missing that will bring us back to reality and dampen our euphoria. The industry analysts for the most part are focusing on the supply side of the NG business, as I have for the last while but maybe there is something to be said for looking past that to the demand side. The following will happen at certain points...as it did last time when prices ratcheted up. 1. Natural gas liquids will be left in the stream of gas going down the line. This has, as we saw a couple years ago, a significant effect on the volumes being shipped. It becomes more economic for the seller of the product to leave the liquids in and reap the higher price than allow them to be taken by various users along the line. An additional 1.5 bcf/day supply can remain in the market if price of NG is at a premium to NGL's.The current spreads would indicate that this could easily start to happen again. 2.Fuel switching was significant in 2001. The charts I have seen indicate that this is beginning to happen again having a significant effect and being a major factor in the reduced demand during 2001. I understand that there are many different factors in play during this go around with opec and venezuela but coal is still a factor. The gas to fuel oil switching capability is around 2.5 bcf/day and even with tight oil supply high priced gas is pushing the market that way. Keep in mind that the plants switched will be the least efficient ones first. 3. We all talk about the number of new gas fired generators coming on line but the new plants are significantly more efficient than the old and as a result can produce the same amount of power using less NG. 4. Gas electricity spark spreads are flat to negative indicative of underlying weakness in demand or at a minimum sufficient power supply. Thus no incentive to build and a significant part of the reason that IPP's have cancelled or deferred over 80,000MW of capacity. 5. As we saw during the last cycle of high NG prices fertilizer, ammonia, and chemical producers are shutting in at these prices and selling the NG feedstock into the market or simply not buying as their product becomes uneconomic. Some have hedged supply at lower price but they either sell it or are near the end of their cheap gas. Industrial consumption is significant but still down from peak levels in 1999, the last of the cheap gas. 6. How much of the price is determined by speculators rather that hard core supply and demand? Is there some fluff in the prices. 7. LNG...This is the wildcard in my mind as it has significant potential and is being awakened by the higher pricing we have seen in recent years. This market has been aided by liquefaction trains becoming larger and generating their own power, tanker costs falling significantly and overall costs dropping significantly in bringing the product to a willing market. Current and future Atlantic Basin LNG exports become economic in the $3.30 US range while the costs on the Pacific side only face the shipping distance variable. LNG imports will exceed 1.5 bcf a day in 2003 and capacity is increasing through the LNG chain. There are changes made by the FERC to treat terminals as producing asset versus previous treatment as midstream assets which will give operators incentive to build. With projects currently in place U.S receiving terminal capacity should exceed 6 bcf/d by the end of 2006. I remain extremely bullish on the long term future of natural gas, but given the number of factors that can come into play in the near term...I do no consider this to be a slam dunk right now. I was extememly surprised with how things turned out last cycle and just thought that maybe I should come up with a few reasons why some of the things going on may be happening today. Enjoying the discourse...hope we can all make some money. Regards TC

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