Frigid winter? New Englanders will pay through frozen noses for oil and gas

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By Scott DiSavino and Laura Sanicola

(Reuters) - This winter the U.S. Northeast faces its highest energy costs in more than 25 years due to tight heating oil supplies and fierce global competition for liquefied natural gas (LNG) cargoes.

Throughout 2022, consumers have been socked with higher costs for everyday items, including groceries and gasoline. The winter could bring more pain, with heating costs nationwide set to soar as much as 28% from last year, according to the U.S. Energy Information Administration's (EIA) winter fuels outlook.

During long, cold winters, the U.S. Northeast consumes more oil and gas for heat than most of the country, especially the six-state New England region. Residents of Massachusetts, Maine, Vermont, New Hampshire, Connecticut and Rhode Island paid about 36% more for gas and 58% more for power than the rest of the nation over the past five years, federal government data showed.

Exacerbating those high energy costs, New England lacks enough gas pipeline capacity to meet all its heating and power generation needs on the coldest winter days.

So New England power generators rely more on heating oil and LNG than other parts of the country, and prices for those already expensive fuels spiked this year after Russia's Feb. 24 invasion of Ukraine, as global supplies ran short due to supply disruptions and sanctions on Moscow.

Residential consumers in New England are expected to pay an average of 26.3 cents per kilowatt hour for electricity and $19.90 per thousand cubic feet for gas in January 2023, up more than 15% from last year and the most on record for both during January, according to EIA data going back to 1997.

"While most U.S. regions are somewhat insulated from elevated global prices by access to central continental gas production, New England remains an 'energy island'," analysts at investment banking advisory Evercore ISI said, referring to the limited capacity of the region's gas pipes.

"The worse conditions get for Europe, the more exposed New England will be to elevated gas prices and LNG cargo shortages this winter."

U.S. pipeline gas costs about $6 per million British thermal units, far cheaper than in Europe where gas is trading around $39 to attract LNG cargoes.

But LNG accounts for about 5% of New England's gas supply, so power generators there are competing with global markets for the fuel.

"Since the region is reliant on imported LNG during the winter months, we can expect to see price volatility when global events impact demand for this fuel," said Matt Kakley, spokesperson at ISO New England, which operates the six-state region's power grid.

With LNG fetching such high prices in Europe, New England imported just 16.6 billion cubic feet (bcf) of gas as LNG during the first seven months of 2022, down from a five-year (2017-2021) average of 28.6 bcf during that time.

One billion cubic feet is enough gas to supply about five million U.S. homes for a day.

Generally, New England uses very little oil to produce electricity. But during extreme cold snaps, it can surge to more than 25% of power generation. However, oil inventories at power plants were just 40% full at the start of November, according to ISO New England, down sharply from about 53% at this time last year.

Weekly distillate oil stocks in New England, which include oil stored at power plants, hit a 22-year low of 2.8 million barrels in July but have since climbed to 3.6 million barrels by the end of October, according to EIA data.

The ISO said it expects to have enough fuel supplies for mild to moderate winter conditions. But if the weather turns extremely cold, Kakley said there are procedures to expedite supply deliveries to the region and the grid can ask the public to conserve energy.

"Controlled power outages would be a last resort in an extreme situation and not something we are anticipating," Kakley said. There have never been region-wide controlled outages in New England.