Calif. faces record high winter natgas prices

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Calif. faces record high winter natgas prices December 1, 2000

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By Spencer Swartz

SAN FRANCISCO (Reuters) - Record high California natural gas prices - six times what they were a year ago - are unlikely to fall to earth any time soon, pointing toward higher winter heating bills for the state's 33 million residents.

``You may see gas prices come off a little if the weather warms up, but if the weather remains cold the underlying fundamentals of low gas storage and high power demand in California are going to keep gas prices high,'' said Mark Easterbrook, a Dallas-based analyst at Dain Rauscher Wessels.

Wholesale gas prices at the Southern California Border, a major delivery point, quadrupled last month, bouncing from around $5.00 per million British thermal units (mmBtu) in early November to nearly $20 this past week. Gas prices West of the Rockies are nearly triple those seen in other regions of the United States.

The price surge has been caused by a patchwork of factors, including sustained electricity and gas demand due to a chilly November, reduced gas supplies piped into California and low regional gas stocks, drained this past summer by gas-fired power plants kept running non-stop to keep air conditioners going.

Gas is the single biggest fuel used at California power plants, producing about 30 percent of the state's electricity.

Home gas furnaces also boost demand this time of year, triggering an especially sharp price rise as they tap into already low supplies.

Maintenance and repair work at several of the region's big nuclear power plants and dwindling hydropower imports from the Northwest - itself contending with a chilly autumn - have also cut deeply this past month into the pool of available gas.

The lofty prices also reflect gas traders' efforts to build a supply cushion to shield themselves from panic buying should the market suddenly be hit by a cold snap or big power plant outage.

NATIONWIDE CRUNCH, BUT TIGHTEST IN THE WEST

The impact of high gas prices this winter will likely ripple well beyond California, affecting more than 56 million homes nationwide that use gas. Many industry analysts forecast heating bills to increase around 40 percent over last winter.

Underpinning these outlooks are the low gas supplies in storage facilities across the U.S., brought on by a sharp decline in drilling activity in 1997 after energy prices plunged.

Overall U.S. gas supplies stand 17 percent below 1999 levels. In the west, stocks are 25 percent behind last year at only 65 percent capacity, the lowest level in five years.

Meanwhile, gas demand has surged, especially in the electricity sector, which has shunned coal and oil for environmental and economic reasons and instead favored gas for new power plants.

In California alone, which already has close to 30,000 MW of gas-fired generation, another 2,000 MW of gas-driven generation is expected to begin service by next summer. And a host of similar units are planned in California in the coming years.

WEATHER IS KEY

After three mild winters, many meteorologists have called for a return to normal winter temperatures across the U.S., which would mean higher heating demand and higher heating bills.

Despite the forecasts, gas producers say they can meet demand this winter, according to Paul Wilkinson, vice president of policy analysis at the American Gas Association.

And there are clear signs, like the record number of rigs currently drilling for gas in the U.S., that price relief will soon arrive, though possibly not until the spring.

``We've been seeing signs for some time now that supplies are beginning to increase,'' Jay Saunders, a Baltimore-based analyst at Deutsche Bank, said, adding that gas production in the largest gas states, like Texas, rose two percent in the first six months of 2000, after stagnating in recent years.

In addition, it remains to be seen what type of winter lies in store for California and in the West. If the weather stays mild, energy demand will fall, bringing gas prices closer to earth.

^ REUTERS@

http://www.individual.com/story.shtml?story=d1201151.301

-- Martin Thompson (mthom1927@aol.com), December 01, 2000


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