NGI The Weekly Gas Market Report
Importing natural gas into Texas? Could the possibility evenexist? Unless the state’s oil patch has a revival in the nextcouple of years, a new study predicts that Texas soon will beconsuming more gas than it produces, pumping up the possibility oftransporting gas into the state that has long boasted its status asthe energy capital of the country.
Dr. Bernard Weinstein and Dr. Terry L. Clower of the Center forEconomic Development and Research at the University of North Texasfound that rising natural gas prices may be having a beneficialshort-term effect on producers’ bottom lines, but overall, thehigher prices will have a devastating effect on Texas’ economy.
“The gas is here, but we can’t keep up with the demand for it,”said Weinstein. Twenty years ago, the high prices for natural gaswere good for the economy, but Weinstein said times have changed.Now demand is greater than supply, and high prices are actuallyhaving a negative effect.
The supply and demand problem isn’t just affecting Texas — theresearchers noted the negative impact on the nation’s economy isalready being seen in California and a few other states. Thattrend, said Weinstein, will continue without a boost in productioneverywhere.
“A few months ago, there was a lot of hand-wringing about thehigh gasoline prices,” said Weinstein. “It was my view that we hadmore to worry about with natural gas prices, because while gasolineprices will go down in the fall, I think natural gas prices willstay high. They’re twice what they were a year ago, and they couldgo even higher. That’s a much bigger problem than what we pay atthe pump for a few months of the year.”
Weinstein published that conclusion in the study, “The Impact ofHigher Natural Gas Prices on the Texas Economy.” The figures arestatic, presuming that natural gas prices will not dropdramatically, and that the economy will remain at a constant level.Currently, the two things most affecting supply and demand are a”lack of capital, which most affects the smaller producers, and aloss of human infrastructure,” said Weinstein. “There are noworkers for the rigs.”
For every $1 increase in the price of natural gas, the studyfound that the state’s economic activity is reduced by at least$3.4 billion a year, translating into 34,000 lost jobs, and reducedsalary, wage and income of $911 million.
The immediate impact, of course, is seen in higher energy bills,and across the country, utilities are requesting rate hikes tocover increased fuel costs. In Texas, more than 60% of the electricutility capacity uses natural gas, and the state’s two largestutilities, Reliant Energy and TXU Corp., have both applied for rateincreases related to the higher gas costs.
Take TXU’s request for a rate hike. In three months’ time —between April and June —TXU reported that its fuel costs rose to$4.59 billion from $869 million at the beginning of the year. Theincreased costs played havoc with TXU’s second quarter earnings,too, when it reported that despite a 23% increase in revenues, itsoperating income was only up 9%.
All of this is related to the “fuel factor,” which has remainedunchanged in seven years. The natural gas portion of the formulapresumes that TXU will pay $1.58/MMbtu. This year, TXU has paidabout $3.11/MMbtu. To make up for the hike, TXU has applied for a6% surcharge for six months, along with an overall 6.7% increase inrates.Reliant Energy also is requesting a rate increase to makeup for its rising fuel costs.
“For Texas in particular, natural gas prices probably have moresignificant economic implications because they’re not going to comedown quickly,” said Weinstein. “We’re going to see more of this(rate hikes) until supply can catch up with demand.”
The Weinstein-Clower study, completed in July, found that by itsvery nature the natural gas picture is more complicated — strongU.S. economic growth has bolstered demand and affected prices. Forexample, natural gas industrial consumption, which takes up about40% of U.S. demand — has grown 4.5% in the past year alone, withthe strong economy leading to more construction, and more naturalgas-powered homes and businesses. Most electric generating capacityalso has moved toward gas-fired turbines, both for regulatedutilities and non-utility generators.
“Problems on the supply side have exacerbated the price spike,”said the authors. “Drilling for gas plummeted in 1998 and early1999 in the face of low prices. Between January 1998 and April1999, the number of rotary rigs drilling for natural gas fell from609 to 371; in Texas alone, the rig count dropped from 376 to 180.All told, the amount of new gas discovered in 1998 was equal tojust 61% of that year’s production.”
Because of the supply side problems, producers now can’t keep upwith the rising gas demand. Total consumption was 21.4 Tcf in 1999and it is expected to be near 22.5 Tcf this year, and jump another3% next year.
“For Texas, higher gas prices bring both good news and badnews,” said the study. “Because Texas ranks number one among thelower 48 states in on-shore gas production, higher prices generateadded jobs, income and severance tax revenues. Each $1 increase inprice, if sustained, boosts the state economy by almost $3 billionand creates a additional 8,800 jobs paying $415 million. At thesame time, however, higher operating costs for Texas industriesusing gas as an input will decrease total state output by $4.29billion and displace 21,000 jobs paying $758 million.”
As a result, said Weinstein, the higher costs to Texas industryand households “more than offsets any gains.”
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