January 2, 2001
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Energy Watchers Worry Shortage
May Loom as Winter Prices Soar
By CHIP CUMMINS and ALEXEI BARRIONUEVO
Staff Reporters of THE WALL STREET JOURNAL
The nation's inventory of stored natural gas has hit historic lows, prompting a handful of energy watchers to fret that an outright shortage could loom this winter.
Cold weather has blanketed much of the U.S. in the past two months, forcing utilities to draw down more quickly the nation's stored supply of working gas -- natural gas already produced and stored below ground. Utilities use that stored gas to help meet demand during the winter heating season.
Working gas inventories for this time of year are as low as they have ever been in the nearly seven years they have been tracked, threatening near-depletion if harsh weather doesn't moderate, according to some estimates.
"Given the forecasts for what appears to be normal to cooler-than-normal temperatures, I put the chances of going through storage at 50-50" this winter, says Frank D. Bracken, a Jefferies & Co. analyst who follows natural-gas stocks.
Soaring Gas Prices
The storage situation, sluggish supply and snowy weather have combined to help push natural-gas prices to record levels. On Friday, natural gas for February delivery jumped to $9.775 per million British thermal units, up 51 cents.
That is about four times the price of a year ago and near the record of $10.10 per million BTUs reached last month for the January contract.
The American Gas Association, an industry group of gas-burning utilities, said that as of Dec. 22, working inventories stood at 1.938 trillion cubic feet, down 24% from a year earlier and off about 20% from a five-year average.
Based on winter withdrawal rates from previous years, analysts estimate that working gas inventories could fall below 500 billion cubic feet by April. That would be a record low and constitute just 15% of total natural-gas storage capacity.
Customer Needs
At such low storage levels, pressure often isn't sufficient to get enough gas out of underground reservoirs. Since storage withdrawals average about 18% of overall daily demand in the winter, low inventories could make it difficult for utilities to meet customers' needs.
"The fact that we're depleting gas very rapidly, early, augurs poorly for daily deliverability," Mr. Bracken says.
Already, companies that agree that their service can be interrupted in times of need in exchange for cheaper rates have been asked to switch to alternative fuels. While this happens nearly every year during peak demand, many industrial gas users also have voluntarily cut back on consumption this time around as soaring gas prices make their manufacturing unprofitable.
The rapid price increase is likely to damp further industrial use and even residential demand, once higher home heating bills start arriving in mailboxes. That may discourage natural-gas use enough to keep storage levels adequate. About 7% of natural-gas demand for this time of year already has been eliminated due to contracted interruptions, shutdowns and fuel switching, estimates Cambridge Energy Research Associates.
One Worry
One worry, though, is that working gas inventories are so low before January and February, when gas demand typically peaks. "We are fast exhausting all the easy, low-cost options of switching to alternative fuels," says Larry Goldstein, president of the Petroleum Industry Research Foundation in New York. "
Should storage levels drop too much, utilities may have to resort to more severe cutbacks, including curtailment of service to customers who haven't agreed to interruptible contracts.
So far, utilities aren't predicting any shortages for their so-called "firm" customers, those who haven't agreed to interruptible service. State regulators, who confer frequently with utilities on service dependability, say they haven't been warned of shortages, either.
Assured on Supplies
Ed Holmes, vice chairman of the Kentucky Public Service Commission, said he has been assured by state utilities that supplies are sufficient for the winter, but concedes, "if it gets excessively cold or if it's sustained cold, that could change."
If curtailments do become necessary in some areas, residential users, along with high-priority commercial users such as hospitals, will likely get their natural gas first. Utilities have to notify state regulators of any curtailment action, and in the case of extreme shortages, federal regulators can be called in to set priorities.
Even if precariously low storage levels are avoided, this winter's heavy withdrawals will make building inventories next season that much more difficult. Though most agree that natural gas prices are likely to fluctuate and may fall closer to $4 or $5 per million BTUs, one longer-term result of dwindling gas inventories could be relatively high prices well into 2002. |
