N. gas pipeline explosion boosts California prices ($6+ MMBTU)

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Monday August 28, 12:26 pm Eastern Time

Press Release

Natural Gas Pipeline Explosion Boosts California Prices and Safety Bill Prospects

DULLES, Va.--(BUSINESS WIRE)--Aug. 28, 2000--(NGI)---The explosion and shut-down of a 48-year old natural gas mainline in the New Mexico desert a week ago that killed 12 people, has driven gas prices in the already-stressed California market to more than $6 per MMBtu and offered a wake-up call for regulators charged with oversight of the nation's pipelines, according to a special report by Natural Gas Intelligence.

Representatives of the U.S. Department of Transportation's National Transportation Safety Board (NTSB) and its Office of Pipeline Safety (OPS), --- which has been under fire recently for lax oversight --- scrambled to the scene of the blast near Carlsbad, NM. Finding corrosion in one of the pipe fragments, OPS followed up within days with the most aggressive order it has ever issued, cutting flow on the ruptured 30-inch pipeline and two parallel lines operated by El Paso Natural Gas, a pipeline subsidiary of El Paso Energy, until extensive testing and repairs could be completed.

OPS made clear there would be no gas flowing until it had closely examined testing results and approved a return to service. NTSB Chairman Jim Hall followed up by saying ``no American would want to use any transportation vehicle that would not be properly inspected for 48 years, nor should we have pipelines traveling through any of our communities in this condition.''

Just when all three lines will be returned to service is up for grabs. El Paso hopes to have one line back in service early this week. Stacey Gerard, associate administrator of the Department of Transportation's Office of Pipeline Safety (OPS), told NGI that El Paso must provide ``written documents [in] black and white in the hands of this department'' spelling out testing results before the DOT can make a decision about restoring service on Line 1110. Line 1110 apparently was the line least affected by the Aug. 19 explosion.

The gas market isn't betting on service being restored soon. El Paso provides significant volumes to the strained California market. Wholesale prices at the California border soared into the $6.70s/MMBtu on Friday from an average (bidweek) of $2.32 last year. Prices outside California remained under $5 last week.

While the pipeline claims it is making up about half the outage, or 500 MMcf/d, through storage withdrawals, alternate lines and cutbacks by some customers, the shortfall threatens to make a bad situation in California worse. Gas being drawn from storage will have to be replaced before winter.

What is clear is that consumer advocates and supporters of more rigorous pipeline safety laws now expect legislation to be passed during the current session. After the explosion, Rep. John Dingell (D-MI) called on the General Accounting Office (GAO) to join in the investigation of the fatal pipeline blast. The GAO had issued a Dingell-sponsored report in June, painting a picture of OPS as an agency that was soft on pipeline safety violators.

The accident has drawn the intense scrutiny of regulators on the nation's largest natural gas pipeline operator. El Paso Energy operates 40,000 miles of pipe. OPS already has said it wants the company to submit a plan for examination and testing of its entire 10,000-mile southwestern pipeline run by its El Paso Natural Gas subsidiary.


-- Cave Man (caves@are.us), August 28, 2000


Aug 26 2000 4:00AM ET More on Economic Focus... Experts Up Their Oil Price Forecasts

By Stephanie Mercurio Markets Writer

Not so long ago, analysts thought an oil price above $18 a barrel was unsustainable. But these days, with Brent crude back above $30, many experts doubt we will see $20 oil anytime soon.

Earlier this month, prices of Brent crude, the North Sea benchmark, hit a 10-year high of $32.80. Oil hasn't been so expensive since the Gulf War a decade ago sparked fears of a serious shortage.

A booming U.S. economy has boosted demand for oil here, and global oil usage is rising, as well. Factories' energy needs are growing steadily, and consumers have funneled ever more gas into their cars and heating oil into their furnaces.

A Real Shortage, or An Imagined One?

Unlike during the oil embargoes of the 1970s, there is enough oil to go around. But even the oil industry would prefer to see lower, stable prices. Oil producers fear that a long-running stay near $30 a barrel could cause economic problems and intensify the search for alternative energy.

"In the long-run, oil much above $30 a barrel is to the detriment of everybody," says Pierre Ellis, economist for Primark Decision Economics. "Once prices get to be a certain level, there is a strong incentive to look for other sources of energy."

Some economists argue the current situation is more the perception of a supply problem, rather than an actual shortage. Still, plenty of questions linger over whether the industry can boost supply enough to discourage that perception.

The Organization of Petroleum Exporting Countries tried in the spring and summer to knock down the price of oil by raising production quotas. But dissention among the ranks of OPEC members sent mixed messages.

"OPEC always keeps the market guessing as to whether supplies keep coming," says Tom Carpenter, chief economist for ASB Capital Management. He says the cartel's bi-monthly meetings only exacerbate the uncertainty over how much oil will be pumped.

With OPEC pumping fairly close to maximum output, many analysts doubt the cartel can successfully drive down the cost of a barrel of oil.

"Some people have this idea that OPEC will limit production at $25 a barrel, but I don't think that's valid," says Alan Ackerman, chief market strategist for Fahnestock & Co. "I think they are somewhat capacity-constrained."

For some time, oil analysts had opined that $20-a-barrel crude was about the maximum sustainable level. They still believe oil prices must fall -- it costs only about $10 to produce a barrel -- but most doubt they will slip back below $20 anytime soon.

"I don't think energy prices will get down to $18/$19 a barrel anytime soon," says Al Meyers, chief equities officer for Lion Street Asset Management. "There is a stronger worldwide economy, so oil demand continues to increase."

When We'll See Relief

With winter and colder weather approaching, the perception of a supply-and-demand imbalance may linger. Forecasters don't expect slack demand until about six months from now, once the winter peak season passes and heating oil use ebbs. Market psychology for the moment, however, is focusing on the near term.

Meanwhile, there are signs that demand is cooling somewhat, even if the supply side of the equation seems intractable.

"When oil prices get past around $30, demand slows down and people literally stop buying the sorts of things that use it," says Carpenter. "At some point there is an intersection."

In many ways, higher oil prices act as an economic brake, much like a tax increase or interest rate hike.

"In the U.S., there has already been some decrease in the usage of energy products," says Carol Stone, deputy chief economist for Nomura Securities. "If its true that U.S. (growth) might slow down, as a result other countries that are heavy oil importers might also experience slower growth. That would lower prices."

Although growth is slowing, it remains plenty strong, as evidence by a recent report showing the economy expanded at a 5.3-percent pace in the second quarter.

What it Means for Oil Stocks

Oil's extended rise has created opportunities, as well as problems. Oilfield services firms, the big integrated oil companies and most every other company attached to the industry have watched their profits soar and, more recently, their share prices rise.

Still, investors haven't driven oil company share prices to the moon. Stock market players have been reluctant to count on a sustained oil price about $20 or $25 a barrel. They figure that, someday, oil must return to earth.

Exxon-Mobil 52-week performance chart

Chevron 52-week performance chart

Texaco 52-week performance chart

"If you do the arithmetic, you'll see energy performed well and already reached prices reflecting positive earnings," says Hugh Johnson, chief investment strategist for First Albany Corp.

Some analysts say emerging companies are the best bets. Envious of the earnings boost at their more established brethren, smaller players have started a new wave of speculative exploration. A year ago, ASB's Carpenter says, there were about 500 oil drills in this country, and now that number is up around 1,000.

http://www.cnbc.com/commentary/commentary_full_story_Markets.asp?Story ID=22051

-- Cave Man (caves@are.us), August 28, 2000.

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