Turmoil hits energy markets

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Turmoil hits energy markets Natural gas prices reach record levels

12/02/2000

By Terry Maxon / The Dallas Morning News

Low storage levels and the onslaught of cold weather have pushed natural gas prices to all-time highs, with winter still ahead for consumers.

Natural gas closed Friday at $6.673 per million British thermal units on the New York Mercantile Exchange futures market, its highest close ever. A year earlier, it was hovering just above $2.

The "scary part," said Dallas-based energy analyst Jim Wicklund of Dain Rauscher Wessels, is that prices have reached these heights with the winter heating season just beginning.

"We don't know what the upper limit is," he said.

The current rise in prices is no surprise, "not given what we've seen with weather and storage withdrawals," said another energy analyst, Tom Robinson of Cambridge Energy Research Associates.

The American Gas Association reported this week that the U.S. natural gas in storage decreased by 5.5 percent, down 146 billion cubic feet to 2,502 billion cubic feet last week. By comparison, storage increased 5 billion cubic feet in the same week last year to 3,001 billion cubic feet, and was up 8 billion cubic feet to 3,077 billion cubic feet in 1998.

To put it another way, U.S. storage is at about 76 percent of capacity now, compared with 92 percent in late November 1999 and 95 percent in 1998.

"This is a market that's short on gas right now, and the signs of early cold winter and its effect on storage are putting even more intense pressure on the gas market," said Mr. Robinson, a Cambridge Energy Research managing director.

What's true across the country is true in Texas.

Figures from the Texas Railroad Commission show that the state had 226.6 billion cubic feet in storage on Oct. 31, the day before the state's heating season official begins. That's a 31 percent decline from the 328.5 billion cubic feet the state had on Oct. 31, 1999.

Texas Railroad Commission member Charles Mathews said he is concerned about the lower levels of gas in storage in Texas as winter approaches.

"During the winter time, there's never enough production. We're always producing flat out all of the time. We handle the extra load demand by pulling gas from storage. There simply is not enough gas in storage," he said.

That low amount of storage makes it difficult to predict how high prices could go in winter 2000-'01, said Mr. Wicklund of Dain Rauscher Wessels.

"All bets are off. We're only 20 percent into winter. We're way early, and we're already half a [trillion cubic feet] below last year. So the problem right now for the people in the industry isn't so much where the price will go, but who gets cut off," Mr. Wicklund said.

That raises the possibility of more instances in which gas suppliers cut off gas to non-critical users like manufacturers, chemical processors and the like. "It doesn't have to be a colder than normal winter than usual" to have a lot of curtailments of supply, he said.

Last winter, the United States finished the heating season with about a trillion cubic feet in storage. At the current rate, U.S. storage may be only a half trillion cubic feet at winter's end, he said.

"Utilities will pay whatever they have to pay to keep peoples' homes heated," he said.

Mr. Robinson said at some point, it will be cheaper for utilities to cut off customers than to keep bidding natural gas higher.

"The spot price in the California corridor is $18 today, so you can see some of the levels in California markets are quite extreme. In terms of the broader market, it's not inconceivable that we can see $7, $8 gas if we have extremely cold weather in December," Mr. Robinson said.

"It's hard to say how high beyond that. At a certain point, it will interrupt certain manufacturing processes – chemicals, ammonia, things like that, and take some of the pressure off the market. There are tough decisions to make," he said.

Ray Granado, spokesman for TXU Electric and Gas, said there are a number of reasons why the higher gas prices won't translate into comparably higher bills for electricity and gas customers in North Texas, although bills will increase.

The prices paid on futures and spot markets "aren't indicative of average prices to consumer," he said.

For electricity customers, the impact will be lessened by the fact that TXU generates much of its electricity from lignite and western coal and from nuclear energy. Natural gas produces less than 40 percent of its electricity.

For gas customers, the cost of fuel is only a portion of the bill, with other costs comprising about two-thirds of the bill, he said.

In addition, TXU has some contracts to buy natural gas at prices far below current prices.

The Public Utility Commission has given TXU and a number of other Texas utilities permission to raise electricity rates to cover higher natural gas costs, with a surcharge to recover higher fuel expenses incurred before the rate increase was approved.

TXU, which won approval for the first increase in early September, recently returned to the PUC for another hike in electricity rates as its gas costs kept rising.

Experts said that the high prices today are caused partly by the low prices of several years ago, not just for natural gas but for oil.

A collapse in crude oil prices in 1997 and 1998 caused a dramatic cutback in drilling and exploration. Existing gas wells were declining in production faster than new wells were being drilled and their production added to the total.

Since early 1999, oil prices have tripled, and natural gas prices have done the same just this year. As a result, new drilling has increased.

Through Oct. 31, the number of gas wells completed in Texas has risen to 3,782, up 29 percent from the same date in 1999, according to Railroad Commission reports. October 2000 by itself had 429 wells completed, a 57 percent increase from October 1999.

Even so, the 2000 completions lag 1998 by 12 percent and are barely above the levels of three years ago.

Mr. Mathews said the 1998-'99 decline devastated the oil and gas industry, with massive layoffs and shelving of equipment.

"We have not yet recovered from that really severe downturn," he said.

That increased number of drilling permits and completions shows that the industry is ramping back up, "but it will not in any way offset the kind of demand we're seeing," he said.

Even as production declined, there's been a boom in the construction of natural gas-powered generation plants, leading many industry experts to predict that annual natural gas usage will climb from about 22 trillion cubic feet at the beginning of the decade to 30 trillion in the next 10 to 15 years.

Nick Rose, incoming chairman of the American Gas Association, said natural gas prices would stay high through this winter but that more supplies would be available starting in 2001-'02.

"Obviously we're going to have higher prices this winter, no question," he said. "It takes time to get new supplies on board. I personally think we'll see some impact next winter, and then we'll see it come back into balance."

http://www.dallasnews.com/business/228652_gasprices_02bu.html

-- Martin Thompson (mthom1927@aol.com), December 03, 2000


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