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 in a press briefing yesterday. “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.

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 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 havecome into play. While gas demand for generation rose about 6%during the first half of this year, “this is actually not enough tobe the only explanatory variable related to the increases…..ingas prices. Actually, the increases in industrial gas demand thisyear have been higher than we’ve seen in electricity generation,”he said. 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” where it was lastyear at this time, it’s only “slightly behind” (8-9% lower) thefive-year average, he said. “In fact, if you look at the numberslast week, we actually built at a faster pace than the five-yearaverage.”

McGill thinks the industry is in good shape to meet the growinggas demand — production is up slightly, gas reserves are beingreplaced at a rate of nearly 100%, Canadian gas imports havedoubled, the role of liquefied natural gas (LNG) in the market ispoised for growth, and pipeline capacity has risen by 14 Bcf/dsince 1990 “or more and [is] growing.”

Meanwhile, R. Skip Horvath, president of the NGSA, said intestimony to a Senate committee that “thousands of producers arevigorously responding to higher prices by increasing their drillingin order to increase production and get more natural gas to themarket. We are confident that natural gas will meet winter marketdemand.”

In testimony to the Senate Agriculture, Nutrition and ForestryCommittee, Horvath said there has been a “fundamental shift in thenatural gas market” to a period of much higher demand because gasis a “clean, safe, efficient and reliable fuel… This increaseddemand for natural gas, along with a strong economy driving up allenergy 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).

He also noted that the industry went into a slump over the pasttwo years 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 themoratoria against drilling in certain areas — are needed for theindustry to meet the anticipated demand growth that will largely befueled by power generators. “Currently, much of the supply isoff-limits” in offshore waters along the East and West Coasts, aswell as in “much of the Rocky Mountain” region, he noted.

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