POWER POINTS: For US, $2 Gas Is Gone; Do I Hear $4? 8?
24 Jan 15:00
By Mark Golden
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--In time, the California electricity crisis may fade in
comparison with the developing North American natural gas crisis.
Depending on whom in the gas industry one asks, the situation is somewhere
between challenging and disastrous. But this much is clear: Rising gas demand,
with little response to high prices so far, has surpassed stagnant supplies.
Gas futures prices have risen to $5.50 per million British thermal units from
$2 a year ago, yet during that time the number of rigs drilling for gas in the
U.S. has fallen, and those that are operating are producing less gas. Spot
prices shot above $20 this week in the Northeast, about eight times the
year-ago level.
"We are in terrible shape," said Matthew Simmons of Simmons & Co.
International, an investment bank to the gas industry. "We need a September
11-type wake-up call."
"The unforeseen consequences of failing at this will be an important chapter
of U.S. economic history, along the lines of the oil crisis of 1973," Simmons
warned.
The country started this winter with a very healthy gas supply in storage,
but has whittled down those stores to below normal as of the most recent
government report. Given the bitter cold this week in the East and forecasts
for more cold next week, the country looks to come out of winter with
alarmingly low reserves.
From April through October, the gas industry will struggle to refill storage.
Given the depletion rates of U.S. and Canadian gas fields and the greater use
of gas to generate electricity in the summer, Simmons and others expect that
stocks will be disastrously low for next winter.
"There is no way that gas supply will suddenly start to rise," said Simmons,
explaining that cheap gas prices for the past 10 years have damped domestic
exploration, which is expensive. "The industry doesn't havea lot of prospects.
If it did, they would be putting in rigs."
The U.S., according to Marc Rowland, chief financial officer for Chesapeake
Energy Corp. (CHK), has a tremendous problem in its lack of energy planning and
energy infrastructure,
"For 20 years, it was a lot better to be a consumer of energy than a
producer. That has changed," he said. "As a country, we're going to have to
decide what the end of cheap energy means."
Too Soon To Panic?
Some gas producers and energy traders aren't as alarmed. If storage is below
a trillion cubic feet at the end of March and forward prices stay above $4, new
rigs will quickly go up in the Gulf of Mexico, even if those mature fields can
supply only a short-term solution at costs higher than in the past, said David
Keyte, chief financial officer of Forest Oil (FST).
The industry is waiting to make sure that the bull market outlasts the
winter. The price spike of December 2000 spurred a historic jump in drilling,
followed soon after by bottom-basement prices and financial losses for
producers.
"This just happened in 2001," Keyte said. "We had $9 gas followed by $2 gas.
The reason people aren't investing is because they recall that clearly."
Small- to medium-sized publicly traded gas companies usually rely on loans to
fund significant production increases, but banks have tightened their terms.
Not only did the gas-market head fake of 2000-2001 leave balance sheets
burdened, but banks are more wary of the energy industry as a whole after
making a string of bad loans to Enron, other energy trading companies and
independent power producers.
"We're using our cash flow for development spending," said Al Reese, chief
financial officer for ATP Oil & Gas Co. (ATPG). "I don't want to take on the
additional debt at this point."
"People are enjoying the $5 gas today. Most people I know hope it doesn't got
to $6 or $8 and a return to euphoria," Reese said. "But people aren't worried
about returning to$2.75 gas either. When you look at supply and demand
fundamentals, the U.S. has hit its maximum deliverability of natural gas."
Producers, who generally need prices of at least $3 to cover both exploration
and production costs, will raise production slowly this time, Keyte predicted.
Big New Supply Years Off
Producers see various supply solutions over time, often depending on where
they have reserves. Some say the Rocky Mountain region can produce a lot more
relatively cheap gas, if only more pipelines were built to California and the
Midwest.
Others say the industry must build a pipeline from the Arctic Circle, while
others point to more exploration off the U.S. eastern and western coasts,
though environmental concerns inhibit both of those solutions.
Big oil and gas companies plan on importing more gas from outside North
America, though liquefying it for sea transport still requires prices of at
least $4 to be economical.
But even if decisive steps were taken now, none of those solutions will put
significant gas in the pipelines for at least five years.
So for the next several years, demand will have to be damaged to restore
balance to the market. Will demand respond much to a price of $4 to $5?
Residential consumers don't get price signals quickly enough to lower their
thermostats when supplies tighten. Most state regulators take at least two
months to pass higher costs along to consumers.
Besides, the gas industry generally doesn't expect homeowners to respond much
even if their gas bills double, given the relatively cheap levels of the past
10 years.
It remains to be seen whether industrial consumption will decline in the face
of $4 to $5 gas. Some expect a lot of industrial jobs to move overseas, where
gas is cheap.
"Residential demand is very inelastic," Keyte said. "So that gets you to
industrial demand, where I think you'll see give and take for the next two to
five years. But demand has to get knocked out."
Simmons doesn't think it will be that easy.
"We're deluding ourselves to think that the industrial consumer has anything
like the ability for demand destruction that all the analysts think will
happen," he said.
The fertilizer industry is the only major consumer of gas as a feedstock, and
most of the U.S. fertilizer industry disappeared with the last gas-price spike.
For other industrial uses, gas is for heating and represents a small percent of
costs. Even a doubling of fuel costs wouldn't be decisive.
Finally, the ability of industry to switch from natural gas to heating oil is
more like 6% of industrial consumption, Simmons said, not 50% as some used to
think.
As a result, prices could be headed to $8, according to many observers. Maybe
only at that level will homeowners lower their thermostats. Maybe then fuel
costs will become critical for a wide range of industry.
Or maybe North America has a lot more $4 gas than some people think. In
either event, the country's 10-year run of $2 gas is over.
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
(END) Dow Jones Newswires
01-24-03 1500ET |
