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JAMES FLANIGAN

High Natural Gas Prices Not Going Away Soon

December 10, 2000|JAMES FLANIGAN

Prices for natural gas, the fuel that supplies more than 20% of U.S. energy needs, are three times what they were last year. And experts say relatively high prices will persist through 2001 and probably 2002.

The effect on home heating and electric bills, especially in California and the Western states, will be dramatic. Residential customers can expect a 30% rise in gas bills. Commercial and industrial users will be hit with increased costs over the next two to three years.

So higher prices for natural gas, the cleanest and most energy-efficient fuel in use worldwide, will hold back economic growth--perhaps by 1% in the U.S., or the equivalent of $100 billion less in output of goods and services.

With the economy already slowing, "this comes at a bad time," says Tom Robinson, natural gas expert at Cambridge Energy Research Associates.

But there is another side to the high prices. They reflect the increased prominence and demand for natural gas across broad sectors of the economy. And they are sparking stepped-up levels of exploration and development and the building of pipelines and other infrastructure to deliver the fuel.

Robinson doesn't think the current prices--almost $9 per thousand cubic feet (mcf)--will hold for the long term. But his Massachusetts-based research firm is forecasting natural gas at $5 to $6 per mcf through 2001 and into 2002. Those are historically high prices.

The price of oil, too, at $28 a barrel, is well above prices of recent years. But increased imports can more easily push down oil prices. With natural gas, we are presented with a new energy dynamic that has implications for the economy, for energy industries and investments over the next five years.

Today's skyrocketing prices are partly due to a cold winter in much of the nation that is drawing down stored supplies. Recent winters have been mild, obscuring an increase in the use of natural gas.

Natural gas usage to produce electricity in modern turbine plants has been rising for years, as has electricity use in booming high-tech industries. Industrial patterns have shifted. Turbine generators have made natural gas part of the summer air-conditioning cycle.

The trend has been building over most of this decade, says Mark Siegel, chairman of UTI Energy Corp., a Houston-based contractor of drilling rigs. Yet prices stayed low because of an overhang of gas supplies and world economic conditions. So drill rigs sat idle and the cushion of stored inventories shrank.

Now all is changed. Drilling for gas has revived furiously in the U.S., Canada and around the world. Such activity will help supplies just about keep up with rising demand, says energy analyst Douglas Terreson of Morgan Stanley Dean Witter. But nothing in the short term will relieve today's tight supply situation.

Instead, the focus for gas is turning to long-term developments in Alaska, Nova Scotia, Canada, the island nation of Trinidad-Tobago, deep waters of the Gulf of Mexico and new supplies in Nigeria.

More than drilling is involved. There is a growing need for pipelines to deliver the fuel across the nation and in local areas. No sooner was a new pipeline built from Nova Scotia to Boston, for example, than construction had to begin on a second pipeline to meet soaring demand in New England.

A Kern River pipeline is being built to deliver natural gas from Wyoming to California, a state that has suffered extremely high gas prices partly because an El Paso Energy Corp. pipeline exploded in August and has not been fully repaired.

Liquified natural gas terminals in Maryland and Georgia are being reopened and terminals at Lake Charles, La., and Boston expanded to receive tankers of gas from Trinidad. LNG used to be too expensive for practical inclusion in U.S. energy supplies. But now, coming from Trinidad or Venezuela at $3 per mcf, LNG's price is right.

Alaska has abundant supplies of natural gas that are being in effect wasted because there is no gas pipeline to deliver the fuel to population centers in the Lower 48.

But that situation might be about to change. BP Amoco, Exxon and Phillips Petroleum, the three companies that produce oil in Prudhoe Bay, Alaska, last week agreed to put up $75 million to begin development of a $10-billion pipeline that will take gas down through Canada to Chicago. Alaska's Gov. Tony Knowles urged the companies on.

The gas in question is not in the environmentally sensitive Wildlife Refuge. It is being produced as a byproduct of Prudhoe Bay oil, but then pumped back into the ground because there is nothing else to do with it. The new gas pipeline would deliver a lot of fuel when completed in 2006 or so.

In the meantime, efforts to find, produce and deliver natural gas will increase on a broad scale. In California's San Joaquin Valley, drilling efforts are going forward to produce gas from extreme depths of 21,000 feet.

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