Get ready for natural gas pressure Even normal winter weather will likely send prices soaring By John W. Schoen MSNBC Aug. 23  Another costly shoe is about to drop for U.S. energy consumers. Just when gasoline prices seem to be leveling off, get ready for big increases in that other kind of gas. With natural gas supplies at historic lows and demand expected to be strong this winter, analysts expect price spikes to record levels. THE PRICE OF natural gas has already begun to climb, as traders see supply shortages mounting just as the crucial winter heating season approaches. In the past month, natural gas prices have jumped from $3.65 per million British thermal units to $4.79 per million Btus. (Prices are for New York Mercantile Exchange futures for so-called Henry Hub gas, named for the Louisiana distribution point.) And analysts are forecasting prices could double before winter is over unless demand cools or supplies increase. Neither of those outcomes seem likely. We are looking at the highest natural gas prices in a winter period that weve ever seen, said Paine Webber energy analyst Ron Barone. The natural gas market has been out of whack for several years now, but slackening supply was masked by a string of unusually warm winters. The past three have been the warmest on record, due to the long-term weather pattern known as La Nina. But forecasters say that cycle is now coming to an end. So even a return to normal temperatures  let alone a severe cold snap  would bring a big jump in demand for natural gas. The supply problem is also compounded by many homeowners who recently switched from heating oil to natural gas after fuel-oil prices spiked last winter.

Meanwhile, slack demand from homeowners and landlords to heat buildings has been more than taken up by a booming U.S. economys thirst for electricity, which is increasingly generated by plants using natural gas. Though natural gas is used to make only a quarter of all power generated in the U.S., its the fuel of choice for any new plants being built, according to Duke Energy Chairman and CEO Richard Priory. Nearly 95 percent of the all of the planned new (electric) capacity is fired by natural gas.  RICHARD PRIORY Duke Energy CEO It is the one that you can license quickly, he told CNBC last week. It is more environmentally compatible than the other technologies. And for those reasons, plus the fact that it can be delivered quickly to the marketplace, nearly 95 percent of the all of the planned new capacity is fired by natural gas.

Natural gas plants are also cheaper to build. A new electric plant burning natural gas costs about $600 per kilowatt-hour compared to $2000 per kwh for coal. With power companies seeing their demand surging, and deregulation spurring a new round of power plant construction, the demand for natural gas has taken off, according to Paine Webber energy analyst Ron Barone. With the new economy and the wealth created by the stock market, everybodys got bigger homes, everybodys got air conditioning, he said. The U.S. is manufacturing and adding to our system 35 million computers every year. The Internet takes a tremendous amount of electricity. RUNNING ON EMPTY But natural gas supplies havent been growing fast enough to keep up. Thats due mainly to the lingering hangover of an energy price crash in 1998, when oil prices scraped close to $10 a barrel. That produced a cash crunch that forced major oil and gas producers to cut back on drilling and exploration to replace depleted gas fields.

as a result, the number actively drilling oil and gas in the U.S. fell sharply  from 943 in 1997 to 625 in 1999, and last spring hit their lowest levels since 1944. With the surge in oil prices this year, rig counts are back up to nearly 1,000. But Barone estimates the industry needs something like 1,100 rigs to replace the production lost to expiring fields. So no one expects supplies to catch up with demand in time to head off a surge in natural gas prices this winter. To make matters worse, as year-round demand has increased, natural gas suppliers this year have been unable to set aside adequate storage to meet a possible surge in winter demand.

With growing power generation load in the summer a tension has been developing between the need to store gas for the winter and burning it for power generation, said Ed Kelley, director of research for North American gas at Cambridge Energy Research Association in Houston. As a result, say analysts. stockpiles are already about 10 percent shorter than they should be this time of year. Right now, late winter supplies look questionable, said Kelly. What happens when supplies come up short? Nobodys predicting that the gas will stop flowing through the pipes. Instead, analysts expect a form of rationing by price. Already, producers of industrial products made from natural gas like ammonia and fertilizers have shut down plants because of the surge in gas prices, says Kelly. As supplies get tighter, gas companies cut back on service to customers that have interruptible contracts. Those include power companies that can temporarily switch to other fuels like coal or oil. But those customers who do get served can expect to pay a hefty premium  especially if a cold snap creates a short term demand spike.

And while consumers watch their heating bills rise, theyll most likely see headlines about profits for natural gas suppliers rising too. Major oil producers like BP Amoco and Exxon Mobil (the worlds two largest gas producers) enjoy a windfall as they sell higher-priced natural gas from wells that were drilled when prices were lower. The soon-to-be-merged El Paso Energy and Coastal Corp., as the third-largest producer, should also benefit. Enron, the largest marketer of natural gas, is also expected to see a boost in profits from the increased volatility in natural gas prices. Those stocks are up from 10 percent to more than 30 percent in the past month alone  some have nearly doubled this year  as investors see higher gas prices boosting their bottom lines.

And with supplies already expected to fall short, any disruption in the existing production and distribution  like the explosion of a major pipeline in New Mexico last week that killed six people  will only make matters worse. Those include bad weather in the Gulf of Mexico, a major source of U.S. natural gas, which lies in major path for hurricanes. Thats one reason prices continued to move higher this week, as Tropical Storm Debby bears down on the Florida Keys

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-- Martin Thompson (mthom1927@aol.com), August 24, 2000

Answers

The death toll is now at 11. I helped automate the contrls on a couple of the natural gas refineries at Eunice, N.M. in 96-97. They feed into the pipe line which went up.

"As for me..I shall finish the game"!

~~~~~~~~~~~~~~~~~~~Shakey~~~~~~~~~~~~~~~~~~~~

-- Shakey (in_a_bunker@forty.feet), August 24, 2000.