Alabama Shiver shock

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Shiver shock

01/28/01 By GEORGE TALBOT Business Reporter

Evolution of a gas crisis

According to Davis, the natural gas crisis evolved gradually - as relatively low prices in recent years gave exploration companies little incentive to drill - and then suddenly, as this winter's cold sent demand through the roof.

The number of active oil and gas drilling rigs had fallen to a low of 371 by last April, down from a high of 5,644 in 1982. Drilling activity has increased as "wellhead" prices - or the prices that gas suppliers and transporters pay producers - have risen so that the rig count is back up to more than 850.

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Still, there's a lag time of about 18 months before the increased production will reach the market, according to Joe Sims, president of the Alabama and Mississippi division of the U.S. Oil and Gas Association. Sims said that oil and gas companies are producing at full capacity, but that still is 25 percent less than production 20 years ago.

"It's going to take a while to work ourselves out of this," he said.

Compounding the problem is that the nation's electric utilities are using more natural gas instead of coal to power turbines at generating plants.

Alabama Power, for example, is at once Mobile Gas' biggest customer and its biggest competitor for industrial customers.

The Birmingham-based power company cranked up a co-generation plant in Theodore in December that will use up to 40,000 MMBtu of natural gas each day. The company already operates a pair of gas-powered generating units at its Barry Plant in north Mobile County and will add two more this summer, bringing the plant's total to about 200,000 MMBtu of gas per day.

Add that to a Calpine Energy co-generation plant north of downtown Mobile that is scheduled to begin operating this week at 54,000 MMBtu per day, and the total amount of natural gas used by the new electric plants on a given day will be more than 10 times that of Mobile Gas' residential and commercial customers combined.

It's a trend that's occurring nationwide, Davis said, and one that will keep pushing the demand for natural gas whether the winters are cold or not. Gas accounts for about 16 percent of electricity generated today, while 95 percent of new or proposed power plants are fired by natural gas, according to the Department of Energy.

The hunger for more and more gas, particularly over the past three months, brought a dramatic increase in the wellhead price to more than $10 per thousand British thermal unit (MMBtu) earlier this month, up from around half that much in the early fall.

As recently as a year ago, when prices languished at around $2 per MMBtu, Congress stepped in to provide $1.5 billion in guaranteed loans to cash-strapped gas producers who were cutting jobs and retiring drills.

No one, including Davis, predicted that prices would reach their current levels, which receded each day this week on the Henry Hub, a New Orleans-based energy market, to $7.58 per MMBtu as warmer weather prevailed.

By early January, Mobile Gas customers were fast burning through the company's reserve of more than 800,000 MMBtu at its Bay Gas storage cavern at McIntosh, an amount that usually carries the company through the spring. Caught short, the company was forced to order an additional 250,000 MMBtu at peak prices to insure an adequate supply.

While the amount of gas in storage was never so low that company officials feared it would be exhausted, it did fall to an "uncomfortable" level, Davis said.

Mobile Gas' plight was a microcosm for gas suppliers across the nation.

"I think we, basically, totally misread what was happening to natural gas demand," said Matthew Simmons, president of Simmons & Co. International, a Houston-based energy consultant. "We, literally, kind of fell asleep to what was going on."

Consumers paid the price. Because suppliers typically pass through to their customers the price they pay at the wellhead for natural gas, thousands of people opened their gas bills last month to find totals that were double or even triple from the same period a year ago.

Suppliers like Mobile Gas sought and received regulatory approval for rate increases - in Alabama, the rates are controlled by the state Public Service Commission - and then bore the brunt of their customers' frustration.

Mobile Gas customers received a margin of relief because of its proximity to the vast supplies of natural gas in the Gulf of Mexico.

As much as 26 percent of the nation's supply of natural gas is taken from deepwater wells in the Gulf, and it's estimated that the drillers pump more than 1 billion cubic feet of gas each day into a series of processors located near Coden along the Mobile County coastline.

From there, it travels along a series of interstate pipelines - each about the diameter of a semi-truck tire - to the Atlantic seaboard and into Florida. Mobile Gas is rare among municipal gas suppliers in that its pipelines connect directly to the processing plants, saving transmission fees that other utilities must pay to get their gas.

The proximity allows Mobile Gas to save roughly 15 cents per MMBtu, a small amount that begins to add up quickly when you consider that the company will take about 40,000 MMBtu of gas from the processors in January alone.

By comparison, consumers in Boston or New York pay roughly $1 per MMBtu in transmission fees, though the cost varies from month-to-month.

"It may seem like a little, but every little bit helps," Davis said. "And it does add up over time."

But the rates paid by Mobile consumers generally are about the same as consumers across the rest of the nation, because the commodity is bought and sold by suppliers on the national market.

Or, as Donald Oltz puts it, the fact that Mobilians are tantalizingly close to so much natural gas doesn't mean a thing.

"I guess the bottom line is, it's not their gas," said Oltz, the supervisor of the Alabama State Oil and Gas Board.

The cost of doing business The price of the gas is one of two components of a Mobile Gas bill, under guidelines set by the PSC. As the price goes up or down, the company adjusts its bills accordingly, Davis said.

"Ultimately, it flows through to the customer dollar-for-dollar," he said. "We don't make money on the gas as a commodity."

The second component is the company's cost of doing business, a reflection of its investments in pipelines, payroll and other operating and maintenance expenses. The PSC establishes the cost as a flat rate and, according to Davis, Mobile Gas hasn't sought an increase in the fee in more than five years.

But when drillers increase their prices at the wellhead, the cost promptly arrives at the customer's doorstep.

Mobile Gas increased its rates by 40 percent just before Christmas, and then followed that with a 15 percent increase less than two weeks later. The latest increase, which took effect Jan. 1, means the average residential customer using 508 therms of natural gas will pay $769.33 per year compared to $668.95 previously, the company told the PSC. Similar increases were sought for and received by the Birmingham-based Alabama Gas Corp.

But the sky-high bills aren't fattening the gas companies' bank accounts, Davis said.

Davis, in fact, found himself in the rather unusual position Friday of explaining to his investors at EnergySouth's annual shareholders meeting why he'd like to lessen the amount due on the bills he sends out, and soon.

Davis stood before about 50 shareholders in an auditorium at the company's 2828 Dauphin St. headquarters and carefully explained that the record-level gas prices don't necessarily translate into record-level profits.

The company did, however, pay a dividend of 25 cents per share on its outstanding common stock on Jan. 1, and reported net income of $8.8 million for fiscal 2000, or $1.78 per share, up 2 percent from $8.6 million the previous year.

"Contrary to what some might think, Mobile Gas does not reap windfall profits because of the increased commodity prices," Davis told the stockholders.

In some cases, he said, the company stands to lose money when bills get so high that customers default or drastically cut their usage. One of the company's biggest customers, Corus Mobile, which operated an iron-processing plant on McDuffie Island, shut down in November, citing the soaring price of natural gas.

Corus, which employed 55, used an average of 30,000 MMBtu of gas each day, an amount equivalent to the daily usage of Mobile's residential and commercial customers combined.

"The high prices hurt us," Davis said. "They haven't changed the margin of our cost of service. Our fee has remained the same. But the price we pay at the wellhead, which is the price we pass through to our customers, is up, and that's something that is determined by the national supply and demand. So there's little we can do about it except just hope and pray that the prices will come down."

Prices may stay high

But while Davis said he's optimistic that prices will continue dropping from their current high levels - particularly if warm weather holds and suppliers are able to replenish their reserves - he doesn't expect they'll drop to their pre-1999 levels.

Analysts agree, saying it's unlikely prices will fall below $4 per MMBtu given the tight supply and the increasing demand from electricity generators for the summer air-conditioning load. Natural gas consumption is expected to reach 30 trillion cubic feet in 2013 and continue rising to almost 35 trillion cubic feet in 2020. The record high for U.S. annual consumption was 22.1 trillion cubic feet in 1972. That was followed by a decline to a low of 16.2 trillion cubic feet in 1986, from which the market has been recovering ever since.

U.S. Department of Energy estimates indicate that the 1972 record was broken in 2000.

Pressure already is mounting on President Bush and the U.S. Interior Department to sell drilling rights to nearly 6 million untapped acres in federal waters off Alabama near the Florida border.

The sale is opposed by environmentalists and by the president's brother, Florida Gov. Jeb Bush.

In the meantime, the Department of Energy projects that, while the higher prices have caused exploration and drilling activity to rebound, the natural gas they'll recover won't hit the market until mid-2001. Until then, the department projects prices will remain above a $3 per MMBtu minimum.

That means customers like Jiles Hale of Prichard will continue to struggle with their bills. Hale, who is retired, receives about $700 per month in Social Security benefits, his only source of income.

Hale arrived at the Mobile Gas headquarters not long after the shareholders adjourned, bringing with him his January bill of $392.

"I can't afford to pay this," he said, waving the bill like a dirty sock. "I thought my last bill was bad, and it was $180. This is the highest bill I've ever received, and I don't know what I'm gonna do."

He said he hoped to make payment arrangements with the gas company and then, just before passing through its sliding glass doors, he turned and shook his head.

"This is killing me," he said. "I got to eat."

While Hale took his place in line at the bill-paying counter, company officials instructed a Mobile police officer to escort a reporter from the property.

"They don't want you out here," the officer said.

http://www.al.com/news/mobile/?Jan2001/28-a126427a.html

-- Martin Thompson (mthom1927@aol.com), January 28, 2001


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