Economy
Natural-Gas Production Fails
To Keep Up With Demand
By CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
As supply concerns keep oil prices above $30 per barrel, the tightest natural-gas market in years has sent prices of the other fossil fuel to dizzying heights of its own in recent sessions.
Natural-gas producers have been ramping up production all summer, throwing mothballed drilling rigs and offshore platforms back into service and pumping up budgets for natural-gas exploration and production. But those efforts look like they may be coming too late to help consumers this winter.
"We're drilling at unprecedented levels," says John Sharpe at the Natural Gas Supply Association, a Washington lobbying group that represents the country's biggest producers. "It would be very difficult to find any spare equipment out there."
Indeed, the companies that contract drilling rigs and equipment for natural-gas exploration and production are reporting soaring utilization rates. According to Baker Hughes Inc., a Houston oil and gas services company, there were 808 rigs drilling for natural gas last week, up from 561 at the same time last year.
Still, production isn't keeping up with demand. Budgets for finding and producing natural gas were sharply pared back as energy prices fell in the last two years. With prices high again, companies can afford the cost of finding and pumping more gas, but they can't get to it fast enough. They are also running into labor shortages on the gas fields of Texas and on drilling platforms in the Gulf of Mexico.
Inventory Is Low
Meanwhile, a closely watched cushion of stored inventory reported by utility companies each week is about 15% below where it was this time last year and 10% below a five-year average for the season. That has worried many -- traders in futures pits most of all -- that the country is facing an imminent natural-gas squeeze.
Late Wednesday, the front-month future contract was at $5.055 on the New York Mercantile Exchange, up from $5.008 Tuesday. That is more than double its price at the start of the year.
The American Gas Association, an industry group of natural gas-burning utilities, promises reliable service throughout the winter. But "certainly, we're not happy about the higher prices," says Roger Cooper, executive vice president of the association.
The AGA reported Wednesday that producers injected 72 billion cubic feet of natural gas into inventories for the country's electric utilities last week, a higher-than-expected addition.
At Burlington Resources Inc. of Houston, domestic production was 1.47 billion cubic feet of natural gas per day for this year's second quarter, just over 2% more than the 1.44 billion cubic feet a day produced during the same period last year.
'Struggling' Industry
"The industry is struggling to increase its productive capacity," says Bobby Shackouls, chief executive of Burlington, the third largest domestic gas producer.
Small production increases like that come as demand for cleaner-burning natural gas continues to climb. "Anything like a normal winter is just a lot more gas than we've seen" in the past, says Dave Costello, an economist at the Department of Energy's Energy Information Administration.
The EIA now predicts that if this winter is a typical one, Midwestern families could be spending as much as 40% more on heating because of higher natural gas prices. "A real cold spike could cause some problems, the total extent of which we really don't know," says Mr. Costello.
Because natural gas is difficult to transport, most of the gas consumed in the U.S. is produced domestically. Producers say several factors have kept gas companies from quickly ramping up production.
"When prices were low and returns weren't there, nobody spent any money," says Gary C. Evans, president and chief executive of Magnum Hunter Resources Inc. of Irving, Texas, a smaller, independent producer. "Banks are still very, very conservative, and Wall Street is still not giving us the stock multiples."
While Magnum and much bigger companies have recently expanded their production budgets again, producing new natural gas will take time. "It's going to take us a year to two years to get the gas production up to levels to meet demand," Mr. Evans says. |
