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NGSA, AGA Attempt to Dispel Fears of Shortage

NGSA, AGA Attempt to Dispel Fears of Shortage

Despite concerns to the contrary, there will be enough supply of natural gas to meet the demands of customers during the next winter heating season, and the current stratospheric gas prices aren't going to become a "permanent" fixture in the market, according to the American Gas Association, which represents gas utilities, and the Natural Gas Supply Association, which represents major producers.

"The outlook for natural gas supply is solid, both in the short term and the long term.....The market had been temporarily out of balance. [But] it is currently in the process of moving back into balance," Paul Wilkinson, AGA's vice president of policy analysis, said at a press briefing last week. "Natural gas demand will be met this winter," although that "doesn't mean that interruptible customers will get all the gas that they want when they want it."

This improving supply picture, which AGA said is the result of the upswing in drilling activity since May 1999, has begun to have a moderating effect on gas prices. Wilkinson noted that spot gas prices have fallen about 70 cents/MMBtu in the past couple of weeks, and gas for consumption next summer can now be purchased in the mid-$3 area. Futures prices also dipped below the $4 market last week for the first time in nearly two months.

Still, all of this comes too late to temper gas prices for next fall and winter. "Consumers will pay more for natural gas this winter than they did last winter," said Wilkinson, who pointed out, however, that gas prices were unusually low last year. In fact, he estimated that in real terms they were about 30% below the levels in the late 1980s.

While wellhead gas prices have doubled to $4/Mcf since last year, Wilkinson said the "cost of gas to the consumer [at the burner-tip] will not double" in the months ahead. AGA's LDC members have alerted their customers, however, to expect price hikes in the neighborhood of 13-40%. Most are projecting the price rises will fall in the mid-20% range, according to AGA. The increases will be in the "tolerable range," said AGA President David Parker.

Even customers served by gas marketers in retail choice programs will not be able to escape the higher prices, said Roger Cooper, AGA's executive vice president of policy and planning. But he dispelled concerns that the reliability of gas service will be threatened next winter.

Many in the market have blamed the exorbitant gas prices and tight storage situation this summer on the expanding gas appetite of electric generators, but Wilkinson contends other factors are at play. While gas demand for generation rose about 6% during the first half of this year, "this is actually not enough to be the only explanatory variable related to the increases.....in gas prices. Actually, the increases in industrial gas demand this year have been higher than we've seen in electricity generation," he said. Also, both industrial and generation customers have been reluctant to switch from gas to oil to fuel their facilities because of the escalating oil prices.

Supply factors are at work as well. The reason "gas cost[s] $4 on a daily basis in July" is because "about two years ago the drilling [industry] took a nine-month hiatus" when wellhead prices dipped below the $2 level, said Chris McGill, AGA's director of gas supply and transportation.

But in May 1999, prices eclipsed $2, at which time the "drilling fundamentals started creeping back up," he noted. Both drilling and supply, McGill said, began to really pick up steam in October of last year. "We should start to see some of the impacts of this new drilling" reflected in the market soon - more abundant supply and lower prices.

To those who contend there isn't going to be enough gas in storage for next winter, "I say 'baloney,'" McGill quipped. While the level of storage is "significantly below" (20% lower) where it was last year at this time, it's only "slightly behind" (8-9% lower) the five-year average, he said. "In fact, if you look at the numbers [for the week ended July 7], we actually built at a faster pace than the five-year average." Last week, AGA reported injections into gas storage rose 70 Bcf to 1.803 Tcf for the week ended July 14, which lagged behind year-ago levels and were close to the five-year average.

The association expects natural gas stocks to rise to 2.9 Tcf by Nov. 1, which is just slightly below the 3 Tcf of gas that the industry normally has in inventory at the start of the winter heating season.

Overall, McGill thinks the industry is in good shape to meet the growing gas demand - production is up slightly, gas reserves are being replaced at a rate of nearly 100%, Canadian gas imports have doubled, the role of liquefied natural gas (LNG) in the market is expanding, and pipeline capacity has risen by 14 Bcf/d since 1990 "or more and [is] growing."

Meanwhile, NGSA President R. Skip Horvath told a Senate committee last week that "thousands of producers are vigorously responding to higher prices by increasing their drilling in order to increase production and get more natural gas to the market. We are confident that natural gas will meet winter market demand."

In testimony before the Senate Agriculture, Nutrition and Forestry Committee, Horvath said there has been a "fundamental shift in the natural gas market" to a period of much higher demand because gas is a "clean, safe, efficient and reliable fuel... This increased demand for natural gas, along with a strong economy driving up all energy use, is resulting in a paradigm shift."

He also noted that during the past 15 years, since Congress opened the market to competition, demand for natural gas has grown while prices paid declined in real terms from $4.10/MMBtu in 1983 to $3.05/MMBtu in 2000 (1998 dollars).

Horvath said the industry went into a slump over the past two years because the prices of natural gas and oil collapsed, resulting in allocation of less capital to exploration and production activities. "Today, producers are individually responding to the market. The number of active natural gas drilling rigs is up 90% from April 1999. Seventy-five percent of the active U.S. drilling rig fleet is engaged in drilling for natural gas. Thus, the supply of natural gas is expected to slowly increase.

"However, there is a lag between the time producers begin to drill and the time it takes to get that gas to market. It can take anywhere from a few months to several years to bring supply to market, depending upon the geographic location and point in the exploration and development cycle at which producers begin the process."

Horvath concluded that "government intervention in the form of price controls will only harm consumers by creating the very gas shortage we all seek to avoid. In short, the best approach when dealing with natural gas supplies is to let the competitive market work to benefit all of our citizens. "

AGA's Wilkinson said other steps - such as lifting the moratoria against drilling in certain areas - are needed for the industry to meet the anticipated demand growth that will largely be fueled by power generators. "Currently, much of the supply is off-limits" in offshore waters along the East and West Coasts, as well as in "much of the Rocky Mountain" region, he noted.

Susan Parker, Rocco Canonica

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