Tight supplies of natural gas worry officials

Posted: Thursday, May 29, 2003

NEW YORK Although natural gas is primarily a winter fuel, the industry is getting an unusually high level of attention as summer rolls around because supplies are tight and prices are soaring.

This is traditionally the period when demand tapers off and the industry is able to replenish inventories with cheap fuel. But this year, industry and government officials are worrying that supplies might still be inadequate by the time the next home-heating season begins.

At the very least, the fuel being injected into underground storage facilities these days is unseasonably expensive, a cost utilities are likely to pass along to homeowners, industry officials said.

As with most issues confronting the energy business, this one intersects with environmental policy. Natural gas executives have for years complained that their ability to meet the nation's demand is impaired by regulatory red tape and a lack of access to federal lands. Under the circumstances, industry officials believe that argument will now carry more weight in Congress.

The rumblings about the root causes of the current shortfall dwindling domestic production coupled with a cold winter in natural-gas consuming regions of the country reached a wider audience this week when Federal Reserve Chair Alan Greenspan raised them before Congress.

Greenspan described the difficulty the natural gas industry is having as a ''very serious problem'' that could have negative consequences for the rest of the U.S. economy, particularly the manufacturing sector, which relies on natural gas to generate power.

''Working gas in storage is presently at extremely low levels,'' Greenspan testified, ''and the normal seasonal rebuilding of these inventories seems to be behind the schedule.''

In fact, the industry has pursued an intentionally cautious approach ever since the summer of 2001, when record-high prices prompted a flurry of drilling that resulted in a supply glut as the economy sputtered. As prices plummeted below $3 per 1,000 cubic feet, drilling activity dried up and chastened executives vowed to be more circumspect.

Sure enough, the surplus disappeared and supplies tightened. Other factors contributing to the rising price of natural gas have been increased exports to Mexico and a decline in Canadian production the first time that has happened in nearly two decades.

Futures prices are now hovering above $6 per 1,000 cubic feet and natural gas drilling activity is on the rise again, but it takes anywhere from 6 to 9 months for such activity to show up in storage levels.

There is plenty of time to reach the November inventory target of 3 trillion cubic feet, said William Trapman, a natural gas analyst at the Energy Information Administration, the Energy Department's statistical arm.

''The big question is will it be a hot summer,'' Trapman added. ''If it is, air conditioners will run more heavily, increasing demand for electricity.''

Moreover, outages and maintenance-related shutdowns at nuclear plants this spring have led some analysts to conclude that extra demand will be placed on natural-gas fired power plants this summer.

''The hopes of refilling storage to comfortable levels while meeting gas-fired generation demand this summer don't look promising,'' UBS Warburg's Ronald Barone said in a recent report.

A mild summer would help avert any shortage. So, too, would a decline in the price of oil, now above $29 per barrel, giving manufacturers with fuel-switching capabilities the incentive to use crude-derived fuels instead of natural gas.

An Energy Department report released Thursday said the nation had 990 billion cubic feet of natural gas in underground storage facilities as of May 16. That is 35 percent below the 5-year range and the fundamental reason for concern.

''All indications are that this winter natural gas will certainly be more expensive than last winter,'' said Rhone Resch, vice president of energy markets at the Natural Gas Supply Association, a Washington-based trade group.

Resch said the shortfall gives the industry fresh ammunition to press its political agenda on Capitol Hill, including its desire for access to federal lands currently off-limits.

''That's something we're working on as an industry,'' said Mark Papa, chief executive of EOG Resources, a Houston-based oil and natural gas producer.

Congressman Joe L. Barton, R-Texas, who chairs a House subcommittee on energy, plans a hearing on the subject next month, and Energy Secretary Spencer Abraham highlighted the issue in a speech last week, calling for a special June meeting of the National Petroleum Council, a federal advisory committee made up of oil and gas company executives.



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