OK: Natural gas price spike expected

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Natural gas price spike expected 07/19/2000 By Paul English Capitol Bureau

Natural gas prices probably will double this winter, and some parts of the country may experience shortages, an Oklahoma oil and gas industry leader warned Tuesday.

A large majority of Oklahomans and businesses will feel the jump in price regardless of whether they heat with natural gas or electricity.

Dr. Bruce M. Bell, chairman of the Mid-Continent Oil and Gas Association of Oklahoma, said the price increase could affect even those whose electricity is generated by gas.

"For Oklahomans, shortages are not likely, but higher consumer prices are a near certainty," Bell said.

All major natural gas suppliers to Oklahoma consumers are expected to issue similar warnings to their customers today.

"Obviously, prices are increasing, and it's no secret that consumers can expect to see that in their bills this winter," said Don Sherry, a spokesman for Oklahoma Natural Gas.

One natural gas supplier to Oklahoma, Reliant Energy, formerly Arkla, said the increase in gas prices "could result in winter gas bills that are twice the usual amount if there is harsh weather."

Reliant said summer electrical generation at gas-burning plants "has caused the price of natural gas to skyrocket during the time that we traditionally store fuel at low prices."

The Houston-based company also said a drop in natural gas production in recent years has caused the price to increase.

The American Gas Association, which represents local natural gas utilities, will hold a news conference today in Washington to address the anticipated increase in gas prices and possible shortages.

Paul Renfrow, spokesman for Oklahoma Gas and Electric Co., said 80 percent of the power that OG&E produces is generated by low-priced coal, with the remainder coming from gas-fired plants.

A fuel adjustment clause permits OG&E to pass fuel cost changes to its customers.

Renfrow said OG&E is paying a higher price for gas, "and that price is passed along to 650,000 customers in Oklahoma."

"However, it is significantly offset by the amount of coal we burn. We try to minimize the amount of gas we burn."

Bell, chief executive officer of Post Oak Oil, said wellhead gas prices are more than double what they were last winter.

In late 1999, wellhead prices were in the range of $1.60 to $1.80 per thousand cubic feet, he said.

"On today's futures market where gas already is being sold for October delivery, they are above $4 per thousand cubic feet," he said.

"Some believe it will go as high as $5 later in the year. There is little likelihood that they will drop significantly."

Natural gas storage is a crucial element in the supply of gas in the winter. Today, storage is 22 percent below this time last year, which was the lowest on record, he said.

"Current projections suggest that by November when withdrawal begins, there will be nearly one-half trillion cubic feet less than the total storage capacity of 3 trillion cubic feet," Bell said.

He said the natural inclination is to say this is happening because of supply and demand, but "there are several other components to that."

Low prices in 1998-99 drastically reduced drilling, he said.

"Last year at this time, there were 350 rigs drilling for natural gas," Bell said. "Today, there are 662, but it takes about 800 rigs just to replace the daily usage of natural gas.

"Since 1995, demand has risen each year, but supply has remained constant, in the 51-52 billion cubic feet per day range. Demand is expected to grow more rapidly in the next two years."

Bell said production from new wells is declining more dramatically during their first year of production than it has in the past.

"This is particularly true in the Gulf of Mexico and Canada, which supply the majority of North America's natural gas," he said.

Now that the price has risen to $4, the industry has begun to drill more wells, "but there are reasons it may not be as quickly as needed," he said.

Many independent producers are still paying off debt from trying to operate gas wells last year at prices below break-even, Bell said.

"Moreover, there is no guarantee prices will stay up in the long term, even though all indications point to that," he said.

"Some producers are gun-shy, having already been burned. Many bigger companies have increased drilling budgets, but so far it has been a tentative move."

Bell said that perhaps the most important factor is that workers for drilling operations are in short supply, and the problem is growing.

"Tens of thousands of oil-field workers have been laid off in the last two years," he said. "And with unemployment at 2.3 percent in Oklahoma, they aren't coming back.

"Until all of these components have been satisfied, gas and electricity consumers in Oklahoma and the nation will be faced with these higher prices."

Bell said a warm winter would help avoid shortages.

http://www.oklahoman.com/cgi-bin/shart?ID=518454&TP=getarticle

-- Martin Thompson (mthom1927@aol.com), July 19, 2000


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