26 June 2006 00:00 [Source: ICB]
Federal energy officials authorised the expansion of private storage facilities for natural gas last week, because existing capacity may be filled before the onset of winter gas demand. Despite the pending glut, however, Federal Reserve chairman Ben Bernanke warned that gas prices are likely to stay high for some time.
In announcing incentives for private companies to develop additional storage capacity, the Federal Energy Regulatory Commission said that while US natural gas demand has increased by 24% since 1988, storage capacity has increased only by 1.4% in the same period.
‘We have seen record levels of price volatility. This suggests current storage capacity is inadequate… and may be full far earlier than in any previous year,’ the commission says.
The commission’s action follows reports last month by the Natural Gas Supply Association that current US natural gas storage capacity of 3.5trillion ft3 may well be filled by the end of September, well ahead of the usual build up, so US gas producers may have to shut down some production. Shutting gas wells could aggravate price volatility, the commission warned, but added that action now ‘should help reduce price volatility and expand storage capacity.’
Meanwhile, Bernanke says US natural gas prices will remain high for years and are unlikely to return to 1990s levels even if additional domestic supplies come online.
Bernanke says continuing strong demand for natural gas by industry, utilities and consumers amid declining North American gas production capacity means that ‘natural gas prices are likely to remain elevated for at least the coming few years’.
There are several measures pending in congress to open more US offshore oil and gas reserves to development.
However, even with the prospect of extra supplies from LNG and untapped reserves, Bernanke said: ‘Because of the higher costs of producing these supplies relative to the traditional sources of natural gas, as well as the elevated cost of other energy sources such as oil, natural gas prices seem unlikely to return to the level of the 1990s.’
But he said that in the long run the market would find a way to balance demand and supply.
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