On April 19, 2012, FERC’s Office of Enforcement presented its 2011 State of the Markets report at FERC’s monthly meeting.  The State of the Markets report is an annual presentation of staff’s assessment of natural gas, electric, and other energy markets.  The report focused on natural gas production, natural gas storage inventories, natural gas prices, liquid natural gas (“LNG”) export proposals, power prices, gas and electric demand, and gas-fired generators.

Staff’s report highlighted that domestic natural gas production reached an all time high during 2011.  This dramatic increase in production caused supply to outpace demand, leading to record amounts of natural gas storage and prices falling to a 10-year low.  Natural gas producers have stated that the increased supply and low prices will chill their ability to engage in new exploration. The glut of natural gas supplies has led developers and investors to focus more intently on LNG.  FERC examined seven LNG export proposals in 2011.

Increased production, low natural gas demand and warm winter temperatures have led to natural gas storage inventories that are now over 50% of the five-year average.  Even with the increase of natural gas in storage, market conditions do not support the building of new storage.  Commissioner John Norris (D) questioned why there was not an increase in storage construction.  Staff responded that the market does not support more storage construction due to the fact that, “storage value has significantly declined due to [falling natural gas] price[s].”

Staff’s report also highlighted the effect increased production of natural gas has had on long-haul pipelines.  Due to increased production in the Marcellus and other shale basins, demand for long-haul pipeline transportation capacity has declined due to the increase in short-haul pipeline transportation demand.  When Commissioner Cheryl LaFleur (D) inquired about the “threats and challenges” the market currently faces, staff responded that, “there is a re-contracting risk as they lose customers to short-haul pipelines…that could impact the remaining customers on long-haul lines.”

The increase in production and decrease in price of natural gas has increased the electric sector’s reliance on natural gas-fired plants.  Natural gas now accounts for 20% of the nation’s total generation output.  However, FERC staff cautioned against a concentration solely on natural gas. Staff said a lack of fuel diversity would have a negative effect on generation markets.

A copy of staff’s 2011 State of the Markets presentation is available here.

A webcast of FERC’s monthly meeting with staff’s presentation is available here.