Natural gas prices push major change

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Dec. 8, 2000, 10:26PM

Natural gas prices push major change By JAMES FLANIGAN Tribune Media

The price of natural gas, the cleanest and most energy-efficient fuel in use, which currently supplies more than 20 percent of U.S. energy needs, is three times what it was last year. And experts say high prices will continue through 2001 and 2002.

The effect on home heating and electricity bills, especially in Western parts of the country, will be dramatic. Residential customers can expect a 30 percent rise in gas bills. Commercial and industrial users will be hit with higher costs over the next two to three years.

High natural gas prices also will hold back economic growth -- perhaps by 1 percent in the United States, or the equivalent of $100 billion less in output of goods and services. With the economy already slowing, "this comes at a bad time," says Tom Robinson, natural gas expert at Cambridge Energy Research Associates.

Robinson doesn't think the current prices -- almost $9 per million British thermal units or BTUs -- will hold for the long term. But his Massachusetts research company is forecasting natural gas at $5 to $6 per million BTUs through 2001 and into 2002.

The price of oil, too, is well above the prices of years past. But increased imported supplies more easily affect oil. With natural gas, there is a new energy dynamic, with implications for the economy, for energy industries and investments over the next five years.

Demand up, supply down Today's skyrocketing prices, to begin with, result from a cold winter drawing down stored supplies. Recent winters have been mild, so increased use of gas hasn't attracted attention. But use of gas to produce electricity in modern gas turbine plants has been on the rise. As gas is used for electricity, the fuel has become part of the summer air conditioning cycle. The result is that gas usage is up 19 percent in the last two years while U.S. production has remained flat.

"In fact, the trend to greater natural gas use has been running much longer than that," says Mark Siegel, chairman of UTI Energy Corp., a Houston-based contractor of drilling rigs. But prices stayed low because of an overhang of gas supplies and world economic conditions. So drilling rigs sat idle and the cushion of stored inventories dwindled.

Now drilling for gas is reviving furiously in the United States, Canada and around the world. But the outlook is not good for speedy additions to supply. Douglas Terreson, energy analyst for Morgan Stanley Dean Witter, says the coming year will see only a minor increase in production.

Instead the focus for gas is turning to long-term developments in Alaska, Nova Scotia, Canada, the island nation of Trinidad-Tobago and the deep waters of the Gulf of Mexico. More than drilling is involved. There is demand for the creation of a new natural gas infrastructure. One gas pipeline has been built from Nova Scotia to Boston and another is in the works because of New England's demand for the fuel.

Liquefied natural gas terminals in Maryland and Georgia are being reopened to receive tankers of gas from Trinidad. LNG, which now can be landed in the United States at $3 per million BTUs, used to be uneconomical. But now its price is right.

Alaska has great supplies of natural gas that are now being ignored because there is no gas pipeline to deliver the fuel to population centers in the lower 48 states. But last week BP, Exxon and Phillips Petroleum, the three companies that produce oil in Prudhoe Bay, agreed to put up $75 million to begin development of a $10 billion pipeline that will take gas from Prudhoe down through Canada to Chicago. Alaska's Gov. Tony Knowles urged the companies on.

Alaskan gas waits on pipeline The gas in question is produced today as a byproduct of oil, but then it is pumped back into the ground. The new gas pipeline will deliver a lot of fuel when it is completed in 2006 or so. In the meantime, efforts to find, produce and deliver natural gas will increase on a broad scale. New pipelines will be built, predicts Stuart Wagner, of Petrie Parkman, a Denver research and investment firm.

In anticipation of this new era, natural gas producers and pipeline companies, such as Apache Corp., Mitchell Energy & Development, Questar Corp., Dynegy and many others have seen their stock rise this year. "Yet they're still not selling at prices that reflect the high prices for natural gas," says Wagner. Investors, chastened by collapsing prices for oil and gas in the past, are wary of according premiums to energy companies.

Which is sound investment policy. But so is keeping an eye on the emerging natural gas industry, where today's high prices reflect a new dynamic.

http://www.chron.com/cs/CDA/printstory.hts/business/767288

-- Martin Thompson (mthom1927@aol.com), December 09, 2000


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