Saturday May 12 04:30 PM EDT

Energy Industry Raises Production at a Record Pace

By JOSEPH KAHN and JEFF GERTH The New York Times

The energy industry is drilling for natural gas, building gas pipelines and constructing power plants at an unprecedented pace as companies respond to high energy prices by significantly boosting investment.

WASHINGTON, May 12 The energy industry is drilling for natural gas, building gas pipelines and constructing power plants at an unprecedented pace as companies respond to high energy prices by significantly boosting investment.

The intense activity comes as President Bush prepares to unveil a national strategy to address what he has called an energy crisis. The policy is expected to emphasize streamlining of regulations, many of them intended to protect the environment, that Bush administration officials say have caused an alarming gap in energy supplies.

Vice President Dick Cheney, who leads the task force charged with drafting the energy plan, has cited a litany of statistics a shortage of refineries, power plants, natural gas pipelines and other energy resources and infrastructure to warn of a trend toward supply shortages. The solution, he says, is urgent government action.

But the latest statistics from government and industry analysts show the energy industry shifting into high gear, investing heavily in areas that were seen as unattractive just a few years ago. Thus even before the government has eased any regulations, even as high energy prices create a sense of crisis in Washington, the investment boom promises a cyclical increase in supplies that is expected to stabilize or reduce prices in coming months, many industry executives and private analysts say.

"Prices go up and we start drilling," says Jerry Jordan, whose company in Columbus, Ohio, plans to dig 10 to 20 natural gas wells this year. Washington has a role to play, Mr. Jordan said, in opening restricted land for gas exploration down the road. For now, he says, there is plenty of natural gas available and "we're going to get it to the market."

Big oil companies plan to invest about $41 billion to expand natural gas supplies this year, while new drilling rigs in operation have hit an all-time high of 955. That is indicative of what is going on broadly in the industry.

Power companies, reacting to high electricity prices in California and elsewhere, plan to add 90,000 megawatts of electricity generating capacity in the next 18 months, one industry estimate says. That is nearly one-fourth of what the Department of Energy says is needed to meet growth in demand through 2020.

Rising natural gas demand has prompted companies to build transportation pipelines at a frenzied pace. The federal Energy Information Administration says 1,895 miles of new pipelines were added last year. It expects companies to complete 4,300 miles this year and 4,650 miles next year, record increases in capacity.

President Bush said on Friday that gasoline prices were high because refineries, which administration officials said had been hobbled by environmental laws, could not increase output. "The reason why we have problems at the gas pump is that we have not built any more refineries," Mr. Bush said.

While some experts agree with Mr. Bush, others on Wall Street see it differently. Several investment analysts last week downgraded the stocks of leading refining companies because they have produced so much gasoline recently, possibly sending prices south by midsummer.

Mr. Bush and Mr. Cheney have often cited high prices as evidence that industry cannot meet demand because regulations make it too hard to increase supply. Industry officials have applauded the focus on streamlining regulations that they consider costly to comply with. But many acknowledge that those complaints have little to do with the price of gas today.

The reality of energy markets has gotten lost "in the politics of the moment," says Ken Cohen, vice president of public affairs for Exxon Mobil Corporation (NYSE:XOM - news) in Irving, Tex. The company would like to see environmental regulations become more predictable, he said. "But the market isn't broken. If you let the markets work, the markets will clear," or meet demand.

Jay Hakes, who until recently was director of the Energy Information Administration in Washington, said that the recent surge in activity by energy companies shows that there is no chronic supply deficit.

The problem, Mr. Hakes said, is not that energy companies cannot respond to demand, but that newly deregulated energy companies, denied the certainty of earning a return on investments that state and federal regulators once provided, tend to respond all too rapidly.

Oil, gas, pipeline and utility companies shelved investment plans and shuttered operations when energy prices slumped in the 1990's. Demand growth accelerated by the late 1990's, prompting companies to embark on a fresh investment binge that is starting to close the gap today.

"Washington seems bereft of solutions to the real energy problem," Mr. Hakes said. "Deregulation cut the fat out of the system, and left people vulnerable to very volatile markets."

Mr. Hakes said that the government's toughest task is finding a way to buffer the swings between surplus and scarcity. He said such policies might use the Strategic Petroleum Reserve to reduce oil market gyrations. Another possible role for the government would be to offer refiners and electricity providers a tax incentive to build extra capacity that could come on line when supplies are short.

To date, the Bush administration has argued strongly against market intervention, especially when it comes to deregulated electricity and natural gas prices.

"My own view is that the great strength of the American economy is the extent to which we've sort of led the charge on deregulation," Mr. Cheney said in a recent interview. "Over time we'll have much sounder policy if we let the market work."

Yet while the Bush team rules out any action on prices, it treats supply shortages as a national emergency requiring prompt attention. It was a failure of government policy, especially the spread of environmental restrictions, that has left Americans vulnerable to what "Californians are experiencing now, or worse," as Mr. Cheney said late last month.

Industry executives have been pressing for years to get relief from environmental laws most notably the Clean Air Act and land use restrictions. But such regulations are viewed by many executives as nuisances rather than as barriers to meeting demand. Refineries have to satisfy dozens of fuel-grade standards that states set to meet federal pollution-control goals, impinging on economies of scale. Environmental laws and "Nimby" attitudes "not in my backyard" also make it difficult to build a new refinery, although no companies in recent years have tried to do so. But the bigger headache for the industry is fierce competition that keeps profit margins thin. "Our margins are not wide enough to justify building new refineries. When we need to expand, we do it at existing sites," said Gene Edwards, senior vice president of Valero Energy of San Antonio, one of the nation's largest independent refiners. He said the company planned to add enough capacity at existing plants to increase its output of 750,000 barrels of gasoline a day by 90,000 barrels a day. In natural gas, many Democrats agree with the Bush administration that some restricted land should be opened to exploration to increase reserves and tame prices, which spiked last year. But many in the industry say it was economics, not regulatory restraints, that led to the recent shortage. Prices were so low in the 1990's that many companies left the business. Demand crept up as power plants began using natural gas, which burns relatively cleanly, to produce electricity. The industry has since struggled to fill orders, though the recent surge in drilling suggests it is catching up.

The long-term picture looks brighter, even without Washington's help. Late last year, as natural gas prices moved toward record highs, major producers on Alaska's North Slope BP Amoco, ExxonMobil and Phillips Petroleum announced plans to build a multibillion-dollar pipeline to the lower 48 states. The companies control tens of trillions of cubic feet of natural gas in Alaska, but never tapped it because building a pipeline seemed foolhardy when prices were so low.

Electricity followed a similar trajectory. Generators in California and elsewhere did not build many power plants in the 1990's. Chris Seiple, who follows generating companies for RDI Consulting, in Boulder, Colo., attributes that to a hangover from a 1980's building boom, and uncertainty surrounding deregulation.

With no incentives from Washington, power companies have responded readily to higher prices. They are now finishing work on power plants that will add 92,000 megawatts to the nation's capacity by next year, enough to power 90 million homes. That's more than they built in the last decade and enough that Mr. Seiple predicts a new bust will follow the current boom.

-- Anonymous, May 12, 2001