There is enough natural gas for the industry to make it through the winter, but the fear of a shortage is what’s driving gas prices higher, according to Paul Wilkinson, vice president of policy analysis for American Gas Association (AGA).
Speaking at the winter committee meeting of the National Association of Regulatory Utility Commissioners (NARUC) in Washington, DC Tuesday, Wilkinson said the “short-term spike” in prices is mainly a “reaction to the weather.” The gas market “has been tight for several years and reacts more violently to short-term changes in supply and demand,” he noted. There needs to be regulatory and legislative action to help improve the supply picture, but in the near-term supply will be adequate to meet demand.
Meanwhile across town at a Senate Energy Committee hearing, AGA’s vice chairman Bob Best was echoing Wilkinson’s comments. “We’re not here to tell you the sky is falling today but there must be some urgency to this matter,” said Best, who is also chairman of Atmos Energy (see related story). AGA provided the Senate committee with a list of more than a dozen recommendations addressing supply diversification and siting issues. The full list is available at www.aga.org.
Wilkinson said he hasn’t heard of any delivery problems so far from any of AGA’s member companies. “Some of the [local distribution companies] LDCs may be changing their plans to some extent, but I haven’t heard of anything dramatic.” For example, he said some might be making more spot purchases than expected because of the unusual cold. “LDCs are used to this” weather, said Wilkinson. “This winter has been unusual, but it’s not something the LDCs are unfamiliar with.”
Columbia Gas Transmission spokesman Kelly Merritt said this is the coldest winter since 1977-78 on Columbia’s system, which serves much of the Appalachian and Mid Atlantic region. He said although there hasn’t been a new record peak set this winter, the prolonged cold has kept the system stressed for nearly two months straight. The winter of 1977-78, when some communities in the North ran out of gas, was one of the drivers behind passage of the landmark Natural Gas Policy Act of 1978.
Dominion Resources, which serves the same region as Columbia, has seen 14% colder than normal temperatures in Ohio this year to date, according to spokesman Dan Donovan. Ohio temperatures were 20% warmer than normal last winter, he noted. Year-to-date temperatures in Pennsylvania have been 18% colder than normal, and in West Virginia, it’s been 20% colder than normal so far this year.
“The number one reason we are [seeing $40 prices at Dominion South Point today] is the cold weather,” said Donovan. “It’s been a steady cold. The average customer in Ohio in January used 61% more gas this winter than last. We’ve had a steady diet of below freezing temperatures since mid December, and the forecast that we have predicts colder than normal temperatures through mid March.
But Donovan said Dominion isn’t worried. “We have our own storage. Peoples Gas has 11 Bcf of capacity and East Ohio has 60 Bcf of their own storage, as well as considerable other storage on Dominion Transmission and other storage pools and pipelines in the area. So our winter prices have been mitigated somewhat. We’re not scrambling. We’ve taken more storage gas out than we normally would, but it’s almost March. We also have found that there’s gas available, it’s just at very high prices.”
Chris McGill, the managing director of policy analysis at AGA and the former director of the AGA’s gas storage report, said storage levels appear to be headed to the 1996 low of 546 Bcf, but could easily end the winter higher than that if the weather warms up next week. He noted that storage levels have been this low four times in the recent past: 1994, 1996, 1997 and 2001. In two of those years, storage never fell below 800 Bcf, but in 1996 working gas levels dropped below 600 Bcf.
If that happens this year, said McGill, the industry could have a tougher time refilling storage next summer, particularly if there is greater gas demand from power generators due to more gas-fired generation or a hotter than average summer, or both. But McGill also noted that in 2001, the industry managed to inject a record 2,500 Bcf of gas into storage from April through October. Even if working gas levels reach a record low, it’s still possible for the industry to reach 3 Tcf of working gas by Nov. 1, he said.
“All the supply indicators are going south while demand is going north,” said McGill, also noting that natural gas productive capacity is down about 5% from where it was the first quarter of 2001. “We’ve etched out an extreme here. Last week we had the OFO on [Columbia Gas Transmission] issued, which was a first for Columbia,” and there was a Transco OFO Tuesday (see related story). But this price spike is short-lived.” And storage is still within historical norms.
Without a doubt customers will see much higher prices this winter, and AGA officials are convinced the market will remain tight until supply can be improved. “The longer we wait to address [the supply squeeze], the longer we wait to solve it,” Wilkinson told Daily GPI.
He said that more intensive drilling of existing resources is not the answer. Liquefied natural gas, the Alaska pipeline and a focus on less mature resources in the Lower 48 are the keys. “The industry is running as fast as it can,” but production is still falling, Wilkinson said. A regulatory commissioner on the NARUC panel also noted that industry has “pretty much shot the big stuff” and needs to move on to other less mature fields and lands with less restrictions on drilling and higher potential returns.
The gas industry will be at the “whims of the weather and the economy for several years,” said Wilkinson, and there isn’t much that can be done to get it off “the treadmill.” In the short term, the quickest relief would come from more drilling in the Rocky Mountain region, but that region has drilling restrictions and has historically been pipeline constrained. If those two problems are fixed, however, supply increases significantly.
Wilkinson also is big on drilling in the Destin Dome area in the eastern Gulf of Mexico, but that region of the Gulf has been restricted by Florida politics and environmental and tourism concerns. Those issues should be put aside so more production can be delivered, he said. “Nobody is going to see it or know about it, so why not drill it,” said Wilkinson.
Other than that, “I don’t see anything on the horizon that will solve the problem six months down the road or 12 months down the road.”
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