Sunday, September 17, 2000 Natural gas drives the heat up

By Chris Kraul LOS ANGELES: To the surprise of the energy industry and chagrin of consumers, natural gas has suddenly become the hot global commodity of the moment--a key culprit in some states' summer energy crisis, and a suddenly costly 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 United States that businesses and consumers took it for granted, seeing it as a virtually infinite resource that would remain low-cost indefinitely.

But this year, the supply bubble finally burst. Gas prices spiked to all-time highs, inflating the cost of gas-generated electricity and touching off summer power shortages. There is no relief in sight: Utilities are warning of winter scarcities that could boost heating bills by as much as 40% and continue to turn up the heat on wholesale electricity costs.

The prescribed cure for 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 US and Canadian wells can supply them all, a fear that is also driving gas futures prices higher.

Although those wells are pumping at maximum capacity and drillers are marshalling 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, a unit of Utilicorp.

Referring to declining US 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 United States, twice the number in March 1999. Their operators are encouraged not just by the fact that gas now sells for US$5 per million British thermal units--three times the US$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 US$3 per million BTUs, industry sources said.

Even analysts like 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, Michigan, whose pipelines deliver 5% of all US 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 the country--twice the rate planners were expecting just a couple of years ago, said Salomon Smith Barney analyst Raymond Niles.

"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.''

Now, more gas-fired power plants are planned around the country, including at least 50 in the Western US 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.

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 US 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 has 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.''--LAT-WP

http://biz.thestar.com.my/news/story.asp?file=/2000/9/17/business/17csgas&sec=business

-- Martin Thompson (mthom1927@aol.com), September 16, 2000