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Winter 2009/2010 Winter 2009/2010 

Energy Market Assessment Energy Market Assessment

Item No. A Item No. A-3

November 19, 2009 November 19, 2009

Mr. Chairman, Commissioners. Today I’m pleased to present the Office of Enforcement’s Winter 2009-2010 

Energy Market Assessment. 

The Winter Assessment is staff’s annual opportunity to share observations about natural gas, electric and other 

energy markets as we enter the winter.

Heading into the winter, the prospects for natural gas markets are looking better for consumers than they have 

in many years. Gas prices are moderate, storage is full, and supply is plentiful. 
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Spot Gas Prices Reach Spot Gas Prices Reach 

8 Year Low 8 Year Low

Source: Derived

from Platts Data.

Before discussing the winter outlook, I’d like to do a quick review of the market conditions this summer that 

have led us to this point. This summer was exciting in that, in many parts of the country, summer gas and 

power prices fell to the lowest levels since 2001.

The spot price of gas at Henry Hub hit 8 year lows closing at $1.83/MMBtu on September 4. Since then, 

prices have moved upward in the last two months, as technical factors and the influence of passive investment 

in financial markets put upward pressure on physical and financial gas prices. Nonetheless, gas prices are still 

the lowest we’ve seen in recent years.

During the summer, weather was mild over the Eastern third of the country. No hurricanes threatened gas 

supply. California wildfires caused few disruptions of electric generation or transmission.

Even when weather reached extremes, such as a few days in mid-August in the Northeast or in late July and 

mid-August in the Northwest, historical system peaks were never threatened. The only place where the system 

was stressed was ERCOT, where, between July 8 and July 16, load exceeded the previous peak by less than 

2%. During that time, electric prices did increase, but there were no reports of reliability issues, and ERCOT 

did not turn to its reliability-based demand response providers for assistance.
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Robust Production Robust Production

Source: Derived 

from EIA & Bentek, 

October 2009.

30

35

40

45

50

55

60

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Daily 

Volume (Bcfd)

2006 2007 2008 2009

In spite of low gas prices, gas production remains strong. During the first half of the year, production was 

running ahead of last year’s rates. 

Gas production has plateaued in 2009, but has not declined as many analysts expected at the beginning of the 

year. The fall-off in drilling has resulted in production declines in expensive low yield conventional gas 

reservoirs, but this has been offset by accelerated drilling for high yield shale gas and increased well 

productivity. A decline in September production was related to well shut-ins due to low prices and 

scheduled pipeline maintenance. The economics of shutting in shale production is less penal than that of 

conventional wells or coalbed methane, and many additional wells are ready to pour gas into the pipeline 

network, waiting for their final connection.

While the short term production picture is one of finding equilibrium after prices peaked and collapsed the last 

two years, the long-term story is one of abundance. In June, the Potential Gas Committee, an independent 

group that develops biennial assessments of gas resources, raised its estimate to over 2 quadrillion cubic 

feet, one-third more than its previous level and almost 100 years of gas production at current consumption 

levels. The large increase is almost entirely due to improvements in our ability to harvest gas from shale 

and get it to markets at a reasonable cost. For example, not only are we successfully getting more than 

double last year’s supplies from the Haynesville Shale in Louisiana, but producers are also beginning to 

successfully tap into the mid-Bossier Shale that lies just above it. As we have indicated before, gas 

production is becoming more like mining and manufacturing with high probability of production from 

each well drilled. This environment should have profound effects on the traditional boom and bust cycle 

of gas production.

Continues on next page
Continued from previous page

In addition to domestic production, we have averaged 1.2 Bcfd of LNG into the natural gas system in 2009. 

Although this is 19% higher than last year, it is considerably below the predictions of earlier this year. 

Plentiful domestic gas supplies, rebounding demand in Europe and Asia, and extended supply outages in 

Algeria, Nigeria and Norway have moderated demand for additional tanker loads on our shores. 

I will also note that one key source of supply has declined; net Canadian pipeline imports are down 15%,

largely displaced by domestic supply and LNG. 
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Record Breaking Record Breaking 

Gas Storage Gas Storage

Source: 

Derived 

from EIA.

0

500

1000

1500

2000

2500

3000

3500

4000

A M J A M J J A S O N D J A S O N D J F M

5-year range

2007-2008

2008-2009

2009-2010

With production outpacing demand, gas has to go into storage. This year, we breezed past previous years’

highs. At the traditional close of the injection season, October 31, there was 3,788 Bcf of gas in storage, 7% 

more than any time in the past. New storage capacity, 186 Bcf, has been opened over the past 2 years. But, 

even with this new capacity, US storage fields are 98% full.

Storage is so full that pipelines have imposed limits on the amount of gas that can be injected into storage and 

in some instances have asked interruptible capacity holders to make withdrawals. 

Gas is not the only energy source with record high inventories. US power sector coal stockpiles have also 

broken all records, with 198 million tons or 73 day of stocks available. 
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Northeast Northeast 

Infrastructure Build Out Infrastructure Build Out

1 3

2

4

5

6 7

8

1. REX (Clarington) REX (Clarington) 

2. DTI Hub DTI Hub

3. TETCO Northern Bridge TETCO Northern Bridge

4. Transco Sentinel Phase II Transco Sentinel Phase II

5. Iroquois 08/09 Phase III Iroquois 08/09 Phase III

6. AGT J-2 Loop

7. Neptune Offshore LNG

8. Canaport Canaport LNG

Nov-09 1.800

Dec-09 0.200

Nov-09 0.150

Nov-09 0.102

Nov-09 0.025

Sep-09 0.140

Mar-10 0.400

Jun-09 1.000

PROJECT IN SERVICE (BCFD)

MAX CAPACITY

Northeast and Midwest markets will benefit from new infrastructure this winter that provide greater options 

for sourcing and transporting gas. East Coast and Midwestern consumers traditionally relied on the Gulf 

Coast and Canadian imports for gas supply. Through new pipelines and LNG terminals they now have 

access to supplies from the Rockies, and expanded access to gas from Appalachia, and global LNG. 

With 3.8 Bcfd of new Northeastern pipeline capacity and LNG supply, we should see lower basis and price 

volatility this winter. Last year, the Northeast added 1.7 Bcfd, and we saw significantly less price 

volatility even though the winter was colder than normal and demand was slightly up. 

1.8 Bcfd of the new gas service is attributable to the extension of the Rockies Express Pipeline (Number 1 on 

the map), which is beginning service to Clarington, Ohio this month. When REX reached Lebanon Ohio, 

last spring, natural gas from the Rockies gained greater access to eastern markets, lowering prices to East 

Coast consumers and raising prices for Rockies producers. The price difference between the Rockies and 

Appalachia has declined from as much as $1.80 per MMBtu before REX East entered service to 30-35 

cents in August. Early indications in forward prices indicate that the prices will converge further when 

REX is completed. Eastern and western US gas market are becoming coupled.

I would also note that not all pipeline expansions have occurred in the Northeast. New pipeline capacity has 

been added to bring new sources of shale gas in Texas and Louisiana to the market. This pipeline 

capacity has had the market effect of breaking down long standing price differences between market hubs 

in the two states and reducing dependence on gas from the Gulf of Mexico that can be disrupted in the 

event of a hurricane.
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Winter Forward Prices Winter Forward Prices 

Much Lower than 2008 Much Lower than 2008

Source: Derived from 

NYMEX Clearport. Apr May Jun Jul Aug Sep Oct $/MMBtu

Cost of Gas in Storage 

2008

Cost of Gas in Storage 2009

Winter Strip 08-09

Winter Strip 09-10

$0

$2

$4

$6

$8

$10

$12

$14

$16

The robust outlook for production, the lack of hurricane-related supply disruptions during the summer, 

competitive prices for LNG on the global market, storage crammed to capacity and new pipeline capacity all 

contribute to an outlook for moderate gas prices to consumers this winter. At the end of October, I could have 

purchased a fixed price supply of gas for the winter for $5.12 at Henry Hub. Last year, the same supply would 

have cost $7.15. Unlike the spot price of gas, the winter price has remained steady most of the year. 

Let me make two points clear right now.

First, when severe weather occurs this winter, the price of gas will spike. However, all things being equal, 

those spikes are likely to be less severe than they otherwise would have been.

Second, gas that has already been purchased by LDCs for this winter was bought at spring and summer prices. 

Nothing that happens this winter will change that. We estimate the price, on average, of gas put into storage 

this year was around $3.45/MMBtu, compared to $9.84/MMBtu last year. 
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Cool Winter Forecast Cool Winter Forecast 

NOAA’s 

December 2009 December 2009 

through through 

February 2010 February 2010 

Outlook

Source: NOAA Three Month Outlook-Official Forecast for 

Dec-Jan-Feb 2009-10 issued October 15, 2009.

As always, weather is the key wildcard going into the winter. This chart shows NOAA’s outlook for the 

coming winter.

The outlook is for below average temperatures in the Mid-Atlantic and Southeast, with an equal chance of 

temperatures being colder or warmer than usual in the Northeast, Ohio Valley and California. Warmer than 

normal temperatures are forecast for the West outside of California. Other weather forecasts are predicting 

much colder than normal temperatures and snowy conditions after the new year for the eastern seaboard.

Once again, colder-than-normal weather brings spikes in demand and prices, but we expect the price spikes to 

be moderated by the availability of gas from production, LNG and storage and new pipeline and storage 

capacity. 

The South and West are forecast to be wetter than average, with normal precipitation levels along the East 

Coast and in the Midwest. Dryer than normal conditions are forecast in the Pacific Northwest and the Ohio 

Valley. 
The Spread between Oil The Spread between Oil 

and Gas Has Widened and Gas Has Widened

No. 2 

Heating Oil Heating Oil 

NYH

Transco 

Zone 6 NY

-$10

-$5

$0

$5

$10

$15

Price $/MMBtu

2009

$0

$5

$10

$15

$20

J F M A M J J A S O N D J F M

Spot Forward

2010

Source: Derived from ICE 

& NYMEX Clearport.

Difference $/MMBtu

Another wildcard for gas prices this winter is the widening spread between the prices of gas and oil. Last 

December, oil and gas prices reached parity. In the last nine months, oil prices recovered while gas prices fell; 

in September oil was 5 times the price of gas. In forward contracts, this spread has narrowed going into winter, 

but not sufficiently to erase the clear advantage gas has over oil.

Traditionally, the price of oil has acted as a release valve to hold down the spot price of gas. If gas prices got 

too high, demand would decline as larger users switched to oil. Environmental regulations, local reliability 

rules and new plant construction has made the switchover effect less pronounced. Nevertheless, it still exists. 

As the current price differential moves deeper into winter, gas prices would need to rise steeply to create 

incentives to switch. The forward prices indicate some expectation of that possibility. This price relationship, 

then, will help to determine not only how much oil fired generation is used this winter, but also will help 

determine gas and electricity prices as it gets colder.

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Winter (Jan-Feb) 

On-Peak Forward Prices 

2009 vs. 2010

($/MMBtu) ($/MMBtu) % Change

Henry Hub (Gas) $6.80 $5.64 -17%

Midwest ISO (Cinergy) $56.25 $42.74 -24%

Palo Verde* $52.95 $49.25 -7%

Southern California (SP-15) $60.56 $53.43 -12%

Northwest (Mid C) $55.37 $50.99 -8%

PJM Western Hub $68.50 $59.31 -13%

Massachusetts Hub $86.24 $70.53 -18%

New York City $108.50 $86.18 -21%

% Change

2010 Price

($/MWh)

2009 Price

Location ($/MWh)

Sources: Winter is defined here as January and February. Palo Verde price and change is for the first quarter instead of Jan-Feb. Forward on-peak electric and natural gas data is from ICE as of 10/26/09 and is compared to the same forward packages from last Jan-Feb as of 10/24/08. 

I will now turn to the outlook for winter electric prices.

Forward winter electric prices range from 7% to 24% lower than winter forward prices at 

this time last year. These declines mostly follow forward natural gas prices. Another contributing factor is 

likely expectations for electricity consumption. According to data from the Energy Information Administration 

(EIA), for the first six months of the year, electricity sales to retail customers were down 5% from the previous 

year. In the Midwest, where the price decrease is the greatest, the MISO market monitor has also identified the 

increased availability of wind power as a key factor for the decline.

Regionally, electric prices are highest in the Northeast, consistent with the Northeast 

typically having the highest winter gas prices. The West coast has traditionally benefited from lower natural 

gas prices than the East coast. Changing conditions have changed this price relationship. This year, the REX 

pipeline has resulted in a significant improvement in gas prices in the Rockies relative to the rest of the 

country. Also, the price of gas from western Canada has moved upward due to declining gas production and 

the declining dollar. These relatively higher western gas prices are reflected in the gas forwards for January 

and February. 
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Winter 2009/2010 Winter 2009/2010 

Energy Market Assessment Energy Market Assessment

Item No. A Item No. A-3

November 19, 2009 November 19, 2009