Not-So-Infinite Gas Supply Pushes Prices, Demand Up Energy: With year-round usage increasing, the need for new pipelines is crucial.

By CHRIS KRAUL, Times Staff Writer

To the surprise of the energy industry and the chagrin of Californians, natural gas has suddenly become the hot global commodity of the moment--a key culprit in the state's summer energy crisis and a costly, sought-after fuel that has launched a rush of new exploration and investment across the continent.

Painful ironies abound. For 15 years, natural gas was so plentiful in the U.S. that businesses and consumers took it for granted, seeing it as a virtually infinite resource that would remain low-cost indefinitely. Cheap gas was an article of faith in the deregulation of California's electricity market in 1996 and the consumer benefits its proponents touted.

But this year, the supply bubble finally burst. Gas prices have spiked to all-time highs, inflating the cost of gas-generated electricity and touching off California's summer power crisis. There is no relief in sight: Utilities are warning of winter scarcities that could boost heating bills as much as 35% and continue to turn up the heat on wholesale electricity costs.

The prescribed cure for the state's electricity woes--a covey of gas-fired electric power plants--will bring its own set of problems. The natural-gas-fired plants to be built in coming years will suck up enormous amounts of fuel, so much so that analysts aren't sure U.S. and Canadian wells can supply them all, a fear that is also driving gas futures prices higher. Even though existing wells are pumping at maximum capacity and drillers are marshaling every resource to find new supplies--a cyclical response that typically brings markets back to earth--industry watchers fear that prices could remain high for months, if not years. "We don't think there is necessarily enough supply of gas to keep the pipelines full," said Mark Gurley, vice president of trading at Aquila Energy of Kansas City, Mo., a unit of Utilicorp. Referring to declining U.S. production and the difficulty in accessing new reserves, Gurley said: "The problem is the low-hanging fruit has been picked." More than 800 offshore and land-based drill rigs are looking for gas across the U.S., twice the number in March 1999. Their operators are encouraged not just by the fact that gas now sells for $5.18 per million British thermal units--three times the $1.60 futures price in March 1999--but that chances are good that such prices will hold up, despite the current feverish exploration activity.

Those expectations are driving Big Oil's plans for as many as three new billion-dollar gas pipelines to the Lower 48 from Alaska's North Slope and Northwest Canada. Two liquid-natural-gas processing plants on the East Coast that have been in mothballs for 10 years are now being recommissioned to receive LNG imports, a vote of confidence that gas prices will at least stay over $3 per million BTUs, industry sources said. Even analysts such as Stuart Wagner of Petrie Parkman & Co. investment bankers of Denver, who believe prices will moderate over time, warn consumers not to expect much relief soon: "We have a long-term crunch ahead of us. We have been depleting the gas resources faster than ever, and we haven't been spending much money finding new ones."

Said William McCormick, chief executive of CMS Energy in Dearborn, Mich., whose pipelines deliver 5% of all U.S. gas: "There will be a lag between the time people start drilling and you get the added production that the market needs. And, frankly, we are going to have to see drilling activity above where we are before it makes a real impact." What happened to shake up a market that for so long was so boringly placid and cheap? Much of the gyrations resulted from a bigger rise in demand for gas-generated electricity than anyone in the industry foresaw. Boosted by the Internet and telecommunications, electricity usage is growing as much as 5% annually in some parts of California and elsewhere in the country--twice the rate planners were expecting just a couple of years ago, said Salomon Smith Barney analyst Raymond Niles.

Virtually all the incremental power demand is being fulfilled by turbines that burn natural gas--an industry trend that has been going on for 10 years now, fed by the environmental benefits of the relatively clean-burning fossil fuel and technological innovations that brought enormous gains in generation efficiency. "We knew demand was rising, but we didn't have an appreciation for how much, or that things like cell phones would take as much electricity as a refrigerator," said Donato Eassey, energy analyst at Merrill Lynch in Houston. "We missed the point of the extent of technological growth and the demands that it would put on the system." To meet that demand--and to counter the drop-off in imports of alternative sources such as hydroelectric and nuclear power--Southern California Gas Co. and other utilities are seeing enormous increases in natural-gas use. This year through August, the utility "moved" 1.1 trillion cubic feet of gas to its customers, up 10% from the same period last year.

The utility's gas shipments to its power plant customers are up a staggering 67% so far this year, said Lee Stewart, an executive with the company, a unit of Sempra Energy of San Diego. Now, more gas-fired power plants are planned around the country, including at least 50 in the western U.S. capable of producing some 40,000 megawatts of power, which is equal to about 80% of California's consumption on a summer day. Such plants are the biggest reason gas consumption is expected to rise 50% from current levels by 2010, after rising 28% the previous 10 years.

Keeping pressure on prices is the fact that gas demand in California is now a year-round phenomenon. Usage used to peak in the winter, thus enabling utilities to store gas in the summertime, which calmed markets. But higher temperatures and growing air-conditioning demand have caused Sempra Energy's peak-demand day for gas this summer to exceed last winter's top peak-demand day for the first time ever. The year-round demand--compounded by the need to replenish natural-gas storage depleted by the effects of a pipeline explosion last month in New Mexico--has kept the price pressure up in the West at a time it normally eases. Added demand comes at a time when natural-gas production has been declining because of a drop-off in drilling in recent years. From 1980 through the late '90s, the U.S. enjoyed a natural-gas "bubble," a state of oversupply that kept prices low, even when crude oil spiked upward, and forced many gas companies to cap wells. But the increase in consumption and decline in production over the last year and a half have finally caused that bubble to burst, said Ron Barone, an energy analyst with PaineWebber in New York. "There is a lot of speculation in the industry that it will be difficult for drillers and producers to meet demand 10 years from now because consumption is going up so much," said Bill Wood, chief natural-gas forecaster at the California Energy Commission in Sacramento.

Amy Jaffe, senior energy advisor at the James A. Baker III Institute for Public Policy at Rice University in Houston, said there are "remedies down the road" in new pipelines from Canada and huge gas reserves in Mexico.

"But the industry has changed," she said. "When you see an Enron buy up liquid-natural-gas tankers, companies propose these huge pipelines, you know that people see the economics as attractive."

http://www.latimes.com/news/front/20000915/t000087086.html

-- Martin Thompson (mthom1927@aol.com), September 15, 2000

Answers

This natural gas thing has thrown a real curve ball into the equation of what to do about energy. Most everyone is fixated by oil, totally distracted.

-- Uncle Fred (dogboy45@bigfoot.com), September 15, 2000.