Shifting energy outlook should keep natural gas prices high

Thursday, July 13th 2000, 12:00 am

By: News On 6

Natural gas is hot, any way you look at it.
The price has doubled since Jan. 1, supplies are tight, and demand is expected to increase as much as 50 percent by the end of the decade.

Consumers are likely to face higher utility bills as a result, but it could prompt a boom in natural gas exploration.

"I think we'll keep up with demand, but prices are going to remain very high," said Ron Barone, natural gas analyst at PaineWebber Inc. "There's been a structural shift in the demand for natural gas, and there's been a structural shift in gas prices in the United States."

While gas is the fuel for less than 10 percent of the nation's electrical generators right now, that is expected to change drastically in coming years. Gas is becoming the fuel of choice for companies that generate electricity, with almost every generating plant under design or in construction scheduled to burn natural gas.

That's good news for the environment because natural gas burns much cleaner than coal or oil, doesn't have the threat of radioactive leaks like nuclear plants and doesn't require damming of rivers like hydroelectric.

But it's putting pressure on supplies, one reason that natural gas prices have more than doubled this year.

Natural gas, which sold at $2.17 per million British thermal units (BTUs) in early 2000, soared above $4 in late May and peaked at $4.69 a month later. Even with a dip Wednesday because of inventories that are higher than expected, natural gas is still trading above $4.

Allen Mesch, director of the Maguire Energy Institute at SMU, said the upward spike in natural gas prices is unusual for summer, when little gas is needed to heat homes and businesses.

The current prices are "another bit of good news for producers, but consumers are going to be faced with higher prices for gas for heating as well as gas for electricity produced from natural gas," Mr. Mesch said.

Experts say that companies should be able to discover and produce enough gas to keep the generators spinning. However, the effort will come with a cost – to consumers and to the exploration and production companies who must find the gas.

Growing consumption

Currently, the United States consumes about 21 trillion cubic feet of natural gas a year. But under the most conservative estimates, that demand is expected to soar to almost 30 trillion cubic feet by 2015, with some estimates as high as 32 trillion cubic feet or more.

To meet that demand, a recent National Petroleum Council report estimated that companies must invest $1.5 trillion in exploration, production, transmission lines and other facilities over the next two decades to meet the increased demand for natural gas.

In a speech last month, Sen. Frank Murkowski, R-Alaska, cited that report as he warned that energy costs could soar. He chairs the Senate Energy and Natural Resources Committee

"I don't think anybody should be misled that gas will be cheap in the future," Mr. Murkowski told the Energy Efficiency Forum. "The price has gone up, and it will stay up, to sustain future demand and underwrite an expanded delivery system."

Mr. Barone of PaineWebber said in most of the 1990s, Americans used more natural gas than was being discovered.

"Prices haven't been high enough to stimulate enough activity," Mr. Barone said. "That kind of peaked last year. With oil prices plunging, the rig count plunged with it. Last spring, we had the lowest rig count in the United States since Baker Hughes started keeping records in 1944. We were at a 55-year low in drilling activity last spring."

That low came in April 1999 when only 455 rotary rigs were drilling on land in North America. That number now sits at 1,025 as of June, according to Baker Hughes Inc.

"I think we're going to need additional help from outside sources. Clearly, we're going to see increased imports from Canada. We're going to see more liquefied natural gas coming into the country, plus we're going to need higher drilling activity. But I think it can keep up, assuming the price is right and drilling activity is adequate."

Enron Corp., the largest U.S. gas trader, isn't worried that supplies will run short – even though it owns and is building a number of power plants powered by natural gas.

"If you asked an old oil company guy, they would say, 'Well, I'm real worried about it,'" Enron president Jeff Skilling said in a recent interview. "You ask me, and you know what I say? Prices click, we have markets and the price will clear. As long as I have the ability to go out at a price, I can get you the supply you need."

In many cases, Enron meets a natural gas shortage by shutting off gas to industrial customers, and providing them an alternative way to get their business done – more storage tanks so they can produce their product at night when less natural gas is needed by other companies, for example.

"Environmentalists have said for a long time that it's cheaper to conserve than it was to find new supplies. That does seem to be the case," Mr. Skilling said.

There are a lot of companies building electrical generation plants who hope Mr. Barone and the other experts are right about adequate supplies.

The National Petroleum Council study estimates that more than 110 gigawatts of new gas-fired generation will be added by 2010, and 140 gigawatts by 2015. (A gigawatt is a billion watts, or a million kilowatts). That compares to the nation's current generation capability of about 700 gigawatts.

The council estimated that 98 percent of the new generation would be fired by natural gas. That's a sharp turnaround from recent decades.

Coal-fired generating plants became preeminent in the 1970s and 1980s as the United States tried to lessen its reliance on foreign oil. The abundant reserves of coal inside U.S. borders could guarantee a source of energy free of the whims of the Organization of the Petroleum Exporting Countries.

However, the need for energy independence increasingly is colliding with pressure for cleaner air. Natural gas burns much cleaner than coal, and the cost to build a natural-gas plant is much less.

For example, a 500-megawatt plant powered by natural gas would emit no ash or sludge, while a coal plant would produce 125,000 tons a year of ash and 350,000 tons of sludge, according to consultants ICF Resources Inc. The coal plant would emit far more particulates, sulfur dioxide, nitrogen oxides and carbon dioxide than the natural gas plant as well.

In estimates by the U.S. Energy Information Administration, a kilowatt-hour of power from a combined-cycle natural gas plant will cost 3.461 cents in 2015, compared to 4.148 cents for a coal-fired plant in 2015. That's a 16.6 percent savings over coal.

The difference isn't in the fuel costs, where coal is estimated to be much cheaper than natural gas. Instead, the savings come from much lower construction and operating costs for the natural gas plant.

"Overwhelmingly, from an environmental perspective or a capital expenditure perspective, natural gas is the way to go," said SMU's Mr. Mesch.

Consumer impact

But consumers will directly feel the impact of higher natural gas prices, since that is the biggest variable cost, he said. The current high prices "are going to hurt those kind of economics. Where they'll show up in your statement is as a fuel adjustment. You are going to pay for that."

Panda Energy International Inc., a private Dallas company developing a number of natural-gas generation plants, is confident the gas will be there when the plants need them, Panda president Bob Carter said.

In the 27 years he's worked either in the oil and gas industry or power industry, people have always talked about pending shortages, he said. However, reserves keep growing.

He also cautioned that planners shouldn't assume that every plant that's announced will actually be built.

"There's a term in the industry called 'bragawatts.' There are a lot of projects that are announced, but probably only a third or 25 percent of these projects will be built in the long run," he said.

"There's not enough gas in the world to fuel all the projects that have been announced, I guess. But only a small portion of those will actually come on line."

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