LOGA Industry Report - Winter 2009 - (Page 37) Conditions in these two sectors collapses due to mild weather and/or a lagging economy, prices will move south in a hurry as we emerge from the heating season. Weather is anticipated to be neutral to normal over the next several months, although the early variation coming from private forecasting services is wide. That leaves the economy as the wildcard. Like production, conventional wisdom formulating seasonal natural gas demand forecasts were formulated prior to recent economic events. To date, manufacturing output, as measured by the Producers and Manufacturers’ Index (“PMI”), fell below 50, representing a contraction in manufacturing output. Measures of industrial output are currently falling at rates not seen in 26 years and could be a harbinger of significant industrial gas demand contraction over the upcoming heating season and potentially the better part of 2009. Natural gas demand for power generation is a “derived demand.” The power generation sector’s need for gas is based on the corresponding residential, commercial and industrial demand for electricity. While these loads tend to be relatively less sensitive to prices, they can move significantly with changes in income or economic growth (holding weather constant). Current forecasts for the upcoming heating season call for industrial and power generation demand to reach levels somewhere around 5.5 Bcf. A mild recession is likely to reduce this amount to roughly 5.2 Bcf, while a significant recession could reduce seasonal natural gas demand in these two sectors to, or below, 5.0 Bcf, or close to a 10 percent reduction. drive down margins and create additional competitive pressures on these newlydeveloping resources. Decreases in natural gas prices are likely to ripple into state government revenue collections, particularly mineral revenues where current budget forecasts are based on $70 per barrel crude price and $8.00/Mcf natural gas. Embedded in the current state revenue projections, and often not recognized or understood, are the considerable dollars in sales taxes, franchise fees and income taxes that are paid by the energy sector. Energy-related revenues from these sources, which have been additional sources of state revenue growth, could also be challenged. For Louisiana consumers, this winter is likely to be costly since most utilities more than likely purchased their natural gas supplies in advance through the injection season when gas was priced much higher than the current spot level. Ultimately, the lagged impact of lower natural gas prices will find its way into household bills, but probably not until the later parts of the heating season, poor consolation for those suffering from fl at to decreasing real incomes and potentially deteriorating employment opportunities. Of particular concern is the impact that relatively high natural gas prices will have on the state’s industrial sector, particularly petrochemicals. While prices have eased from their all-time highs, domestic natural gas prices are in excess of feedstock prices paid by competing facilities abroad and in lower-cost producing regions. Over the past six years, petrochemical facilities worldwide have been able to pass along ever-increasing prices to a world hungry for consumer goods. This has provided some protection to domestic chemical producers, including those in South Louisiana. However, the current global economic malaise has halted this trend and low-cost foreign production could soon be looking for a home for its excess production. Western Europe and North America are likely places for these competing facilities to dump their production given their relative feedstock cost advantages. If Louisiana facilities are unable to remain competitive during this challenging period, lay-offs comparable to the last economic recession of 20002001 are possible, creating further economic challenges for Louisiana and its economy. ● Figure 3. Manufacturing Activity (PMI) 1989-2008 Louisiana Outlook The outlook for Louisiana is very cautionary. From a production perspective, new resource plays in North Louisiana will be challenged by decreasing prices (revenues) and sticky costs. This will Source: Energy Information Administration, US Department of Energy www.loga.la | 37 http://www.loga.la
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