Coal-to-gas fuel switching may narrow storage surplus: analyst

Coal-to-gas fuel switching may narrow storage surplus: analyst

Washington (Platts)--19May2006

A pronounced shift to gas-fired generation in place of coal could help
wipe out the sizeable surplus in US gas storage inventories, but only if
front-month NYMEX gas futures prices average near $5.50/Mcf for most of the
summer, an industry analyst said.

"Between power generation switching efforts ... and natural gas liquids
stripping, we would anticipate a more normal 'peak' level of natural gas
storage by the end of the [injection] season should summer gas prices average
$5.50 to $6/Mcf, which would require spot prices to fall to $5 to
$5.50[/Mcf]," said Citigroup Global Markets analyst Gil Yang.

According to the US Energy Information Administration's most recent
weekly report, gas storage levels for the week ended May 12 totaled 2.08 Tcf,
running 512 Bcf above last year and 722 Bcf over the five-year average.

Because power providers base fuel-switching decisions on longer-term
price indicators, Yang said gas prices would need to average between $5 and
$5.50/Mcf for three to six months before a meaningful shift occurs to gas from
coal. He estimated about 250 Bcf of gas-fired generation demand would return
if summer prices average $6.50/Mcf, while a $5.50/Mcf average price could
bring back around 500 Bcf of demand and "effectively eliminate the entire
excess storage position."

Furthermore, lower coal inventories also could provide an incentive to
displace more coal-fired generation with gas, the analyst said. Citing
estimates by Citigroup's coal analyst John Hill, Yang said US coal inventories
are close to 30 days, compared with a more typical level of 50 days.

"Power generators acknowledge that an opportunity to build coal
inventories would be welcome--a clear incentive to switch [to] natural gas as
prices fall," Yang said.

If, however, longer-term gas prices remain high in June and July, Yang
cautioned that the opportunity for fuel switching would be limited, thus
increasing the risk of a more pronounced commodity price decline by the end of
the summer.

---Jessica Marron, jessica_marron@platts.com

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