Industry Tries to Cool Regulators' Concerns

State regulators and consumer advocates expressed deep concern over high gas prices last week at the winter committee meetings of the National Association of Regulatory Utility Commissioners in Washington, D.C. But industry officials said record drilling efforts will eventually solve the problem and already may be having an impact.

"We've already seen the price of gas come down 50% at the Henry Hub in the last three months," noted Rhone Resch, director of utility regulations for the Natural Gas Supply Association. "We've seen prices fall 80% at the California border, so we may already be seeing a turn around."

Resch, who joined a diverse collection of panelists to discuss the current market situation, noted that the rig count is up about 125% compared to last year. "More importantly, new well completions were up about 45% in 2000 over 1999," he said. "That's a substantial increase, but I'd also like to point out that 1999 was a very low year compared to 1998. However, if we continue to look at how we're drilling in the United States today with the number of rigs that are out there we're looking at an additional increase in the year 2001 of about 25% growth in new natural gas wells. That would put us at a record level for the last 15 years."

Chris McGill of the American Gas Association said the new "pricing paradigm" for natural gas "at $3 or more" also will attract diverse new sources of supply "out of the woodwork, and that's not only domestic production but in Canada, the northern tier gas in Canada, some very creative ways to look at LNG, gas-to-liquids and many other potential opportunities for gas supply. What we can't really predict is how they get to the marketplace and when they get to the marketplace and what the demand pressures in the marketplace are."

AGA is optimistic about supply, McGill said, "but I would echo the same things I have heard [from other speakers] that the American public has to visit this issue of what we are going to do for energy in the future. That does mean land access issues, attention paid to the environment; it does mean all the players in this debate have to come to the table. We basically took a decade off and we have to come back to the table."

Non-industry panelists painted a very bleak picture of the situation. Akweli Parker, a business reporter at the Philadelphia Inquirer, said he'd like to believe the optimism that increased drilling is going to have a downward effect on prices. "My question is, are consumers going to be able to last during that lag time [between drilling and production]. I hear stories everyday from people who are paying $400 and $500 a month on their gas bill. They are not going to be able to take that for another year. I think a question you regulators might want to be asking yourselves is what we can do to help consumers in the meantime."

Denise Goulet, a senior assistant consumer advocate at the Pennsylvania Public Utility Commission said the industry and regulators bear responsibility for not educating consumers enough. "When we first went into this, seeing the prices rise throughout the summer of 2000, there was a perception among a number of consumer advocate offices that we were just seeing supply and demand trying to balance out and the pricing was reflecting a market that was working. However, I think that perception is beginning to diminish somewhat among consumer advocate offices. Maybe there's more at work here and maybe supply and demand alone isn't explaining what is happening with natural gas prices.

"While prices are down they are still more than twice what they were just one year ago," she noted.

David A. Pursell of Simmons and Company International admitted there are significant reasons to continue to be concerned. Gas production was down 2% in 2000 and the lag time between drilling and production could mean a long wait, he noted. There also is a big concern that if demand is growing at "2-2.5% per year do we think we can possibly grow supply organically at that level without opening up new bases for drilling or significant external supplies like Alaska or LNG?"

Goulet said she wasn't disagreeing with the contention that there is enough gas out there to be drilled. "I think the concern that we have is at what price is it going to come to." She noted that the National Petroleum Council study predicted a 30 Tcf market could be served at gas prices averaging $2.75/Mcf through 2010. "That is not the price consumers are seeing on their bills today."

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