US Natural Gas Reserves Rise, But Prices May Not Fall.

According to a new research report by Ziff Energy Group, a Calgary energy consulting firm, record natural gas drilling in the US and Canada in 2004 resulted in new reserve additions which more than offset production in both countries. The group reported a 15% increase in natural gas reserves in the US lower 48 states at the end of 2004, the biggest improvement in several years. US gas producers succeeded in increasing their reserves despite an 8% increase in collective gas output by the top 30 companies, Ziff noted. In Canada, gas reserves rose 8%, the first overall increase in gas reserves since 2000.

In another research report released on June 6, Martin King, an energy commodities analyst with FirstEnergy Capital Corp., Calgary, suggests that a hot summer in the US could sharply push up gas demand for power generation, thanks to tightening constraints on coal-fired electricity. He said: "This may have profound implications for power generation this summer, the amount of natural gas that reaches gas storage, and how high natural gas prices may have to go to rebalance the market". Although the US still contains "vast quantities of accessible coal reserves", coal-fired power generation is approaching maximum capacity due to limitations of the transportation system for coal, King argues.

In particular, limitations of the rail system which transports "virtually all" coal consumed in US power generation has "kept coal production essentially treading water for the past several years". An "added complication" has been power generators' increasing emphasis on low-sulphur coal to reduce acid emissions, bolstering the need to transport coal to eastern US population centres from lower-sulphur deposits in western US instead of from closer but higher-sulphur Appalachian deposits, the FirstEnergy report noted. Taking into consideration that "very little" coal-fired generation capacity has been added in the US in the past 15 years, and allowing for "the usual round of maintenance, unplanned outages, and ensuring an adequate reserve generation margin", King predicts that the US coal-fired power sector "has reached its effective limits of generation capability for the next few years".

With US power-generation demands continuing to increase, coal stocks held by power generators have recently dropped to some of their lowest levels in 27 years. The implication of rising concerns about preserving coal stocks is that more of the "growing armada" of gas-fired US power plants may be pulled into service in July and August to cover peak power-demand loads during the hottest months of the summer cooling season, King predicts. The result could be a quick reversal of the recent US trend towards higher coal-fired capacity utilisation in the face of high natural gas prices: "If utilization levels are reaching their practical limits for coal-fired generation in 2005, as we believe they are, then additional power needs will fall into the hands of the gas-fired generation mix", King argues. "Much will obviously depend on how hot the summer turns out to be", he added.