Online Story (Dec 12, 2000)

Electric Power Officials: Power plants contribute to high US gas prices

WASHINGTON, DC—Natural gas spot prices, which have recently risen past $9/MMBtu on the New York Mercantile Exchange, are unlikely to fall significantly in the short term, according to natural gas industry representatives and a US Department of Energy official speaking Tuesday at a US Senate Energy Committee hearing. “For this winter, our options are limited,” said Roger B. Cooper, executive vice-president for policy and planning of the American Gas Association. “The market is temporarily out of balance.” Prices will stay high because of the current production slump combined with an upswing in demand, due to a booming economy; unusually cold weather thus far in the winter season; and a strong demand for gas from electricity generation plants, he explained. Cooper stated that the natural gas utilities in his association would continue to fully supply all “firm” contracts, but that some customers paying a lower price for “interruptible” service may see supplies curtailed. He predicted that prices would gradually decline in coming months, but would not return to prespike low prices. Cooper pointed to a decline in production beginning in 1998, when natural gas wellhead prices fell below $2/Mcf for extended periods, leading producers to cut drilling activity almost in half. The industry rig count fell to 300-400 in 1998 from around 600, and while it has rebounded to 810 as of September of this year, “significant price relief is not expected this winter because of the 12-18 month time lag between drilling and delivery,” Cooper said. Mark Mazur, acting administrator of the US Energy Information Administration (EIA), agreed with Cooper’s assessment of natural gas prices, saying the EIA expects an average price of $5.60/Mcf during the October-March winter months. Average winter residential prices are expected to be $9.21/Mcf, leading to an increase in household heating bills of around 50% on average this winter over last winter, he added. Should worse-than-expected weather hit, prices can be expected to rise even higher, Mazur said. “In addition to expected supply and demand conditions this winter, continued increases in natural gas demand from new gas-fired generating plants next year will probably prolong the much-above-normal price environment through 2001, even if further gains in US and Canadian production materialize for 2001, which the EIA anticipates,” Mazur said. Wellhead gas prices are not expected to fall below an average $4/Mcf in 2001, he said, although according to EIA projections they will slowly decline to $3.13 by 2020 in 1999 dollars. Mazur noted the price situation is particularly critical in California, where gas prices have risen to more than four times the national average at times. He attributed this to unusually high demand by gas-fired electricity plants and for heating, as well as low storage levels and low hydroelectric and nuclear generation output. He also said supply to California is being strained by the below-normal flow level of the El Paso pipeline system as it recovers from its August rupture, and lack of available capacity in other supply systems. For John Sharp, vice-president and counsel for the Natural Gas Supply Association, the long-term solution to high natural gas prices is for the government to allow producers further access to federal lands. “If producers are to bring significantly increased supplies of natural gas to market at prices competitive with other fuels, we will need access to resources under government lands—resources where production is currently prohibited by a variety of federal moratoria and regulatory restrictions,” Sharp commented. Pointing to improved, environmentally friendly production techniques, Sharp said: “It does not make economic or environmental sense to deny producers access to federal lands.” According to EIA estimates, some 551 tcf of untapped natural gas reserves underlie federal lands, of which about 215 tcf is unavailable due to moratoria and restrictions. Energy Committee Chairman Sen. Frank Murkowski echoed the call for expanding access to federal lands, expediting pipeline permits, and development of a proposed Alaska gas pipeline project. “We are drawing down reserves faster than we are replacing them with discoveries,” Murkowski said. Deborah Schachter, representing the National Association of State Energy Officials, urged the committee to increase funding for the Low Income Home Energy Assistance Program, which helps lower income US residents pay their heating bills. Schachter called for an increase to $2.1 billion from the currently budgeted $1.4 billion.

http://ogj.pennnet.com/Content/cd_anchor_printscreen/1,1242,OGJ_7_NEWS_DISPLAY_87288_1_7,00.html

-- Martin Thompson (mthom1927@aol.com), December 13, 2000