Despite concerns to the contrary, there will be enough supply ofnatural gas to meet the demands of customers during the next winterheating season, and the current stratospheric gas prices aren’tgoing to become a “permanent” fixture in the market, according tothe American Gas Association, which represents gas utilities, andthe Natural Gas Supply Association, which represents majorproducers.

“The outlook for natural gas supply is solid, both in the shortterm and the long term…..The market had been temporarily out ofbalance. [But] it is currently in the process of moving back intobalance,” Paul Wilkinson, AGA’s vice president of policy analysis,said at a press briefing last week. “Natural gas demand will be metthis winter,” although that “doesn’t mean that interruptiblecustomers will get all the gas that they want when they want it.”

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

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

While wellhead gas prices have doubled to $4/Mcf since lastyear, Wilkinson said the “cost of gas to the consumer [at theburner-tip] will not double” in the months ahead. AGA’s LDC membershave alerted their customers, however, to expect price hikes in theneighborhood of 13-40%. Most are projecting the price rises willfall in the mid-20% range, according to AGA. The increases will bein the “tolerable range,” said AGA President David Parker.

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

Many in the market have blamed the exorbitant gas prices andtight storage situation this summer on the expanding gas appetiteof electric generators, but Wilkinson contends other factors are atplay. While gas demand for generation rose about 6% during thefirst half of this year, “this is actually not enough to be theonly explanatory variable related to the increases…..in gasprices. Actually, the increases in industrial gas demand this yearhave been higher than we’ve seen in electricity generation,” hesaid. Also, both industrial and generation customers have beenreluctant to switch from gas to oil to fuel their facilitiesbecause of the escalating oil prices.

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

But in May 1999, prices eclipsed $2, at which time the “drillingfundamentals started creeping back up,” he noted. Both drilling andsupply, McGill said, began to really pick up steam in October oflast year. “We should start to see some of the impacts of this newdrilling” reflected in the market soon – more abundant supply andlower prices.

To those who contend there isn’t going to be enough gas instorage for next winter, “I say ‘baloney,'” McGill quipped. Whilethe level of storage is “significantly below” (20% lower) where itwas 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 thenumbers [for the week ended July 7], we actually built at a fasterpace than the five-year average.” Last week, AGA reportedinjections into gas storage rose 70 Bcf to 1.803 Tcf for the weekended July 14, which lagged behind year-ago levels and were closeto the five-year average.

The association expects natural gas stocks to rise to 2.9 Tcf byNov. 1, which is just slightly below the 3 Tcf of gas that theindustry normally has in inventory at the start of the winterheating season.

Overall, McGill thinks the industry is in good shape to meet thegrowing gas demand – production is up slightly, gas reserves arebeing replaced at a rate of nearly 100%, Canadian gas imports havedoubled, the role of liquefied natural gas (LNG) in the market isexpanding, and pipeline capacity has risen by 14 Bcf/d since 1990″or more and [is] growing.”

Meanwhile, NGSA President R. Skip Horvath told a Senatecommittee last week that “thousands of producers are vigorouslyresponding to higher prices by increasing their drilling in orderto increase production and get more natural gas to the market. Weare confident that natural gas will meet winter market demand.”

In testimony before the Senate Agriculture, Nutrition andForestry Committee, Horvath said there has been a “fundamentalshift in the natural gas market” to a period of much higher demandbecause gas is a “clean, safe, efficient and reliable fuel… Thisincreased demand for natural gas, along with a strong economydriving up all energy use, is resulting in a paradigm shift.”

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

Horvath said the industry went into a slump over the past twoyears because the prices of natural gas and oil collapsed,resulting in allocation of less capital to exploration andproduction activities. “Today, producers are individuallyresponding to the market. The number of active natural gas drillingrigs is up 90% from April 1999. Seventy-five percent of the activeU.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 todrill and the time it takes to get that gas to market. It can takeanywhere from a few months to several years to bring supply tomarket, depending upon the geographic location and point in theexploration and development cycle at which producers begin theprocess.”

Horvath concluded that “government intervention in the form ofprice controls will only harm consumers by creating the very gasshortage we all seek to avoid. In short, the best approach whendealing with natural gas supplies is to let the competitive marketwork to benefit all of our citizens. ”

AGA’s Wilkinson said other steps – such as lifting the moratoriaagainst drilling in certain areas – are needed for the industry tomeet the anticipated demand growth that will largely be fueled bypower generators. “Currently, much of the supply is off-limits” inoffshore waters along the East and West Coasts, as well as in “muchof the Rocky Mountain” region, he noted.

Susan Parker, Rocco Canonica

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