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Why EnCana’s Deep Panuke Problems Matter Part 2

DOES NEW ENGLAND HAVE A NATURAL GAS DILEMMA?
or….Deep Panuke Part II

By Bill Powers

Part I is here.

Natural gas discoveries in offshore Nova Scotia were supposed to help supply New England with years and years of natural gas supply.  But Exxon has already left the area (Sable Island) and Encana’s reservoirs (Deep Panuke) is watering out well ahead of schedule.

With Marcellus production now peaking, and increased pipeline capacity to the west, north and south—how will New England fare in winter months after two years of record high natural gas prices that are 3-4x the national average?

Will LNG imports make up for any shortfalls?  I don’t think so.  Despite three LNG import terminals in Massachusetts, imports have been collapsing the past few years despite extremely high prices during the winter months.

(Source: http://www.northeastgas.org/about_lng.php )  Below is a graphic displaying the trend of declining LNG into New England:

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Why is this happening? Terminal operators can’t profitably source additional LNG cargoes on the world spot market.

Will new pipelines save New England from double-digit gas prices every winter?  I doubt it.  For example, even though an additional 2.5 bcf/d of pipeline capacity from the Marcellus to New England is scheduled to be online by the end of 2016, Marcellus gas production is set to fall for the first time in July according to the US Energy Information Administration’s (EIA) June 2015 Drilling Productivity Report.
(Source: http://oilprice.com/Energy/Natural-Gas/New-England-Growing-More-Dependent-On-Natural-Gas.html )  While I am very suspicious about most data out by the EIA, it appears they are getting the direction correct this time even though production probably began to roll over several months ago.

What about demand destruction?  Can’t New England just switch back to fuel oil in the dead of winter when natural gas prices are at their highest?  This has been tried already.  After the Polar Vortex of 2014 many utilities went into the 2014-2015 winter with extremely high levels of fuel oil knowing that they might have to find alternatives to natural gas.  However prices at the Algonquin hub still averaged over $17.00 per MMBTU in February 2015.

In fact, the demand for natural gas is becoming increasingly inelastic in New England.  With many homes and business having converted from fuel oil heating systems to natural gas in the past decade, there is an increasingly large portion of the region’s demand that will not be destroyed in the winter months no matter how high prices go.

Additionally, the closure of the Vermont Yankee nuclear plant—along with the majority of coal plants serving the region—means New England now generates approximately 50% of its electricity from natural gas.    Below is graphic produced by the EIA showing the changing make-up of power generation in New England:

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Paper mills in New Hampshire and Maine—large consumers of natural gas but still a small percentage of the region’s overall annual consumption—shut down temporarily during the Polar vortex of 2014 due to extraordinarily high prices.  Unfortunately, New England has very few industries that can easily curtail consumption of natural gas during times of high prices or shortages.

Encana has said it will only produce Deep Panuke during the high-priced winter season.  That means Nova Scotia’s huge and fast declines in natural gas production puts New England consumers in a tough spot–with potentially chronically high winter natural gas prices.

This really shows that estimating future production from any natural gas or oil play is filled with many unknowns–despite what the shale promoters say.  The complexity of projects, whether offshore, shale or conventional, makes future production forecasts increasingly unreliable.  

You need production history from a basin to have any accuracy in estimating future production.   Then everyone’s guesstimates become more meaningful.

Few new discoveries, declining production and high costs combined with increasing demand inelasticity due to the shut down of  many of America’s coal and nuclear will likely lead to extreme price volatility in New England in the short term and potentially much higher prices in medium and long-term.



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