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JAMES FLANIGAN

Hot Decade Ahead for Natural Gas as Demand Grows for Cleaner Fuel

May 07, 2000|JAMES FLANIGAN

Natural gas prices are rising, and talk of shortages is in the air. Is this a new and different energy crisis? No, it's more an opportunity.

Use of natural gas, an environmentally friendly fuel, is increasing in electricity generation.

Supplies are tight because drilling for new gas has lagged in recent years. So now gas prices--and utility bills--are rising, but so are exploration and innovation.

In coming years we'll see many developments technologically and financially in natural gas, in North America and around the world. This is an industry that provides more than 20% of U.S. energy needs today and will provide a greater share tomorrow; an industry to watch.

But the immediate future could be alarming.

"Some utilities could have gas shortfalls this summer," says George Mitchell, chairman and founder of Mitchell Energy & Development, a Houston-based producer of natural gas. Meaning they would have to pay sky-high prices for fuel to meet peak demand.

Rising demand for gas to produce electricity for air conditioning is a new one for the fuel, traditionally used chiefly for home heating. But as utilities have relied increasingly on gas turbines in their new power plants, demand has risen year-round.

Gas prices are now above $3 per thousand cubic feet--50% more than the average of a year ago--and going higher. "Prices will hit $3.50 this summer," predicts Mitchell, whose company is increasing drilling and development on its backlog of 1,000 well sites in North Texas.

The promise, and the challenges, are more than short-term. Major studies by Cambridge Energy Research Associates project use of natural gas growing 5% a year in this decade to a U.S. total of 30 trillion cubic feet a year. Natural gas usage may grow even faster internationally as the clean-burning fuel is favored to relieve serious urban pollution.

The prospect has excited investment markets. Shares of natural gas companies, long in the doghouse as energy prices wallowed at low levels, are now surging.

The major oil companies own the greatest reserves of natural gas--Exxon Mobil controls 60 trillion cubic feet, BP Amoco is acquiring large holdings.

But current market favorites are medium-sized gas companies. The stock of Apache Corp., a Houston-based producer in the Gulf of Mexico and Canada, rose 16% last week to $56 a share. It has risen 60% in the last two months.

EOG Resources, an oil and gas company spun off last year from Enron Corp., the nation's largest marketer of natural gas, rose 16% to $28.44 last week after doubling in the last two months.

But investors are fickle. If gas prices were to retreat, those stocks would fall just as fast. Only two years ago, as oil and gas prices fell to less than half their present levels, professional investors called energy companies "destroyers of capital" because they explored for commodities that did not generate a high return on investment.

"Investors had a point--look at the dismal returns," says analyst Mary Safrai of Carl H. Pforzheimer & Co., a New York investment firm that specializes in energy issues. For most of the 1990s, oil and gas producers earned 10% or less on invested capital. Investors shifted their backing to technology industries that far outpaced energy companies in earning power and growth.

Faced with such withdrawal of capital, companies cut back their drilling in 1998 and 1999. And that led to today's tight gas supply.

And though returns are now rising and investor perceptions changing, it will remain a challenge to finance the buildup of resources needed to meet the projected natural gas needs of this decade. One estimate puts the total in capital spending by energy companies, electric utilities and their suppliers at $500 billion.

On the positive side, there is no doubt that the gas is available. World reserves of natural gas even today are three to four times those of oil on an energy-equivalent basis, experts say. And technology will only expand reserves of gas.

Companies are drilling to unprecedented depths in the Gulf of Mexico, extracting deposits of gas that were impossible to produce a decade ago. Vast supplies are available in fields in northwest Canada and off Canada's east coast. And there is a huge supply of natural gas on Alaska's North Slope, awaiting a pipeline to link it with the network of lines that transport gas through Canada and into the lower 48 states, says analyst Stuart Wagner of Petrie Parkman, a Denver energy research firm.

In California, test wells are being drilled to unprecedented depths in the San Joaquin Valley by Tri-Valley Oil & Gas, a Bakersfield firm that has been producing in Kern County for 38 years but now hopes to hit a major jackpot.

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