BB and all. Think GAS - Lengthy but worth the read.
Nov. 5, 1999, 5:25PM
Industry believes tightness of supply inevitable, especially if normal winter weather hits
By MICHAEL DAVIS
Copyright 1999 Houston Chronicle
About six months ago, Doug Faulkner, an oilman from Enid, Okla., mailed out letters to news outlets across the country with a dire warning: Sometime in the year 2000, the United States will face a natural gas shortage of "catastrophic proportions."
The letter received little notice. In it, Faulkner made a number of simple observations that others are now beginning to notice.
U.S. natural gas production is declining. Consumption is increasing. Reserves are being depleted at an accelerated pace. The facts point unswervingly to declining supplies of a fuel that is taking an increasingly large role in generating power and fueling U.S. industry.
Since Faulkner mailed the letter in April, the rig count has improved, but that hasn't reversed the trend. Nor has he changed his conviction that a natural gas shortage is imminent.
Even though natural gas prices are trading back up at a healthy range from $2.50 to $3 per thousand cubic feet -- most producers can turn a profit when they are above $2 -- the industry still is trying to recover from the blow it took when prices plunged in 1998, and budgets for oil and gas drilling were slashed.
"When it comes to better prices, I feel like telling people, `We appreciate the flowers, but next time send them to the hospital and not the morgue,' " said Faulkner, who estimates gas production in his home state will be down by about 8 percent this year.
He would like to be drilling more wells, but he can't. He has a good prospect he wants to drill but his drilling contractor only has one crew for three rigs, so Faulkner must wait.
"A shortage is inevitable," Faulkner said. "And when prices go up, it will be the producers who get blamed again."
Faulkner's somewhat alarmist stance is not shared by everyone, but all who were interviewed for this story believe that supplies will get increasingly tighter and prices will rise.
Rising prices, while increasing producers' cash flow, won't solve the basic problems created by the boom-and-bust nature of this business, such as the current shortage of rig crews.
"These sorts of things can't be turned around overnight," said Ray Seegmiller, chairman of Houston-based Cabot Oil & Gas.
Earlier this year, Seegmiller and other energy industry executives were invited to the White House to discuss the nation's energy industry and energy concerns for the future.
Seegmiller pointed out to administration officials that U.S. natural gas production is decreasing, even though the number of rigs drilling for natural gas is on the rise. There are about 630 rigs drilling for gas now, compared with 515 at this time last year.
Again, the message was simple: The country is headed for a shortfall in gas supplies.
"The concern people are feeling now, if we have a normal winter, is whether we are going to have the gas next year to fill storage," Seegmiller said.
The Department of Energy estimates U.S. gas production through September at 13.98 trillion cubic feet, off 1.2 percent from the same time a year ago. Demand for the year is expected to be up about 2.4 percent, according to the department.
Even though futures prices last week have sagged on forecasts of another mild winter this year, indications are that gas supplies will still be stretched thin and prices will rise to levels not seen in years.
And, if forecasters are wrong, and cold weather finally arrives after two of the warmest winters on record, prices on the spot market -- where gas is bought for immediate delivery -- could rise as high as $10 per thousand cubic feet, said Wayne Andrews, natural gas analyst with Raymond James & Associates in St. Petersburg, Fla.
"We think we are due for a wake-up call and it's going to come this winter if we have any kind of normal weather conditions," Andrews said.
The U.S. National Oceanic and Atmospheric Administration, commonly known as NOAA, currently is predicting that winter temperatures will be normal in the upper Midwest, and as high as 20 degrees warmer than normal in the South. Only the Northwest will see a colder-than-normal winter.
Despite the tepid outlook, one widely followed forecaster said it's unlikely the nation will experience another winter as warm as last year's.
"The odds are against it," said David Salmon with Weather Derivatives, a Belton, Mo.-based company that provides forecasts for the energy and agriculture industries. "Most of the places where it is expected to be colder than normal, however, are not where the people live, like the Upper Midwest."
Natural gas prices are up about 40 percent compared with this time last year. Contributing to this rally has been higher prices for competingfuels, such as heating oil, which is up 72 percent this year. Prices for natural gas liquids such as propane have doubled in the last 12 months.
Heating bills are expected to be up all over the nation. The Energy Information Administration, the research arm of the U.S. Department of Energy, is predicting heating bills this winter will be 19 to 44 percent higher than last year's, depending on the severity of the winter and region of the country.
Even before the summer was out, Houstonians were paying more for their natural gas. In August, Entex, the city's natural gas local distribution company, increased its fuel-adjustment fees for the next six months upward by 3 cents per thousand cubic feet to reflect the utility's expectations that it will be paying more for the gas it resells here, said Wayne Stinnett, senior vice president at Reliant Energy's delivery group.
"Last year in Houston, we had a 33-percent-warmer-than-normal winter, so most people got about a $50 break on their gas bills in the winter months of November through March," Stinnett said.
For the winter months last year, the company based its fuel adjustment assumptions on gas prices averaging $2.25 per thousand cubic feet, but this year they are assuming a cost of $3 per thousand cubic feet. The average customer pays about $30 a month for natural gas and uses about 60,000 cubic feet of gas in a normal winter.
Entex expects to have an adequate supply of gas for the winter, with supplies locked in under long-term contracts, Stinnett said.
Rising demand over the last two years has been masked by the warmer-than-normal winters, said Steve Thumb, a principal with the energy consulting company Energy Ventures Analysts in Arlington, Va. As such, there are hypothetical factors affecting gas prices now as people bet on how the winter will shake out.
He sees a "tremendous tension" between the traders using technical forecasts and market speculation to buy and sell gas, and the fundamentals of the market.
"Right now, it appears the technical people have control of the market," Thumb said. "It will not be resolved until the winter really breaks."
Prices are going to be much stronger this year because, even if the country has an average winter heating season, it will be like a deep freeze compared with the last two winters, Thumb said.
"Those back-to-back, extremely warm winters have only occurred three times in 104 years of weather data," Thumb said. "We are not going to get it this year, so we will be tested."
The probability of a repeat of the 1995-96 winter is "at best possible," Thumb said. In that winter, the nation was caught short of gas supplies and prices at the Henry Hub in Louisiana -- where natural gas futures contracts are settled -- reached as high as $12.75 per thousand cubic feet.
Saying he is not part of the "scare routine," Thumb doubts prices will hit $10, but believes they could reach the $4-to-$6 range.
As the nation enters the winter heating season, which officially began Nov. 1, there are mounting signs that gas supplies are tight and getting tighter.
Traditionally, when the winter heating season begins, pipelines and natural gas local distribution companies such as Entex like to see about 3.1 trillion cubic feet of natural gas in storage for winter use. As of Oct. 29, there was 3 trillion cubic feet in storage, according to the American Gas Association.
On the New York Mercantile Exchange, the natural gas contract for April is selling well above $2 per thousand cubic feet. Typically in the so-called "shoulder months" of May/April and September/October, when both cooling and heating demand are down, prices are much lower. Prices have been relatively weak lately, but that would change overnight with the arrival of a strong cold front.
The increased use of natural gas to replace coal and heating oil for power generation has created a demand cycle that peaks twice a year instead of only once in the winter. Now, prices also peak during the hottest summer months when so-called "peaking" power plants are brought online to meet the demand for air conditioning.
One sign of the growing importance of natural gas to generate power is the backlog for turbines used in gas-fired power plants. A power plant turbine ordered from GE Power today would be ready for delivery in the second quarter of 2003, a company spokesman said. GE Power's manufacturing facilities, as are those at other turbine makers, are working at 100 percent capacity.
New Orleans-based Entergy recently cut a deal with GE Power to ensure delivery of 32 gas turbines from 2001 through 2004.
The Gas Research Institute is projecting that about 50 percent of natural gas demand growth from 1997 through 2015 will come from the power-generation sector.
Rising imports of natural gas are being readily absorbed. The Energy Information Administration is projecting imports will be up about 10 percent for the fourth quarter and first quarter of 2000.
In 1998, Canada exported 3 trillion cubic feet of gas to the United States. That total is expected to more than double over the next year or so. As new projects such as the Northern Border pipeline expansion and the Alliance and Maritimes & Northeast pipelines come online, they will move another 3.7 billion cubic feet of gas per day into the U.S. market.
Canada's National Energy Board estimates that some 5,000 new wells will need to be drilled per year just to keep up with current demand.
A big push to find more gas will be needed in this country to reverse the trend here.
"What the industry now faces is not just maintaining current production levels but stopping the decline," said Andrews. "That is something the industry has not had to do for the last 20 years. Previously, it always had available production capacity.
"These warm winters have lulled the industry into complacency," he added.
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