Nat­u­ral gas stor­age, pipe­line ills keep costs high in U.S.

The Washington Times Weekly - - National - By Brad Foss

The coun­try is awash in nat­u­ral gas in­ven­to­ries, and mild tem­per­a­tures have kept de­mand in check. But the price of this home-heat­ing and power-gen­er­a­tion fuel is still soar­ing above his­tor­i­cal norms. What gives? When­ever en­ergy prices jump, con­sumer groups are quick to ac­cuse spec­u­la­tors and the in­dus­try, while in­dus­try ex­ec­u­tives point fin­gers at en­vi­ron­men­tal poli­cies they say re­strict sup­ply growth. Cer­tainly, oil above $60 a bar­rel puts up­ward pres­sure on nat­u­ral gas. The cur­rent sit­u­a­tion, how­ever, high­light­san­oth­er­knot­ty­mar­ket­forceat work, an­a­lysts and ex­ec­u­tives say.

A dearth of nat­u­ral gas stor­age and­pipelineca­pac­ity,par­tic­u­lar­lyin the North­east, raises the risk of bot­tle­necks dur­ing pe­ri­ods of peak de­mand, and that places ab­nor­mally high sea­sonal pres­sure on prices — even when na­tion­wide sup­plies are boun­ti­ful.

“Most peo­ple just take it for granted that the gas shows up when they need it,” said John Hop­per, chiefex­ec­u­tive­of­fi­cerofFal­conGas Stor­age Co. But as a re­sult of ris­ing de­man­dandin­suf­fi­ci­entin­vest­ment in the equip­ment needed to trans­port nat­u­ral gas from pro­duc­ing ar­eas to con­sum­ing ar­eas, “we’re bust­ing at the seams.”

On the New York Mer­can­tile Ex­change, front-month nat­u­ral gas fu­tures traded close to $9 per 1,000 cu­bic feet in late Novem­ber. They are now trad­ing near $7, which is still more than a 60 per­cent in­crease since late Septem­ber. Be­fore 2000, nat­u­ral gas fu­tures rarely climbed above $3.

Nat­u­ral gas is used to heat roughly 62 mil­lion homes in the United States, and it is in­creas­ingly im­por­tant as a source of fuel for power pro­duc­ers, driv­ing up the cost of elec­tric­ity.

If nat­u­ral gas prices do not be­come more stable, the in­dus­try could­very­well­lose­mar­ket­shareto coal and nu­clear power, said Mark Fiedorek, a vice pres­i­dent at Hous­ton’s Duke En­ergy Gas Trans­mis­sion, which will be re­named Spec­tra En­ergy Corp. next year when it is­spunoff­frompar­en­tDukeEn­ergy Corp.

He said the coun­try’s nat­u­ral gas “plumb­ing” is un­der stress partly be­cause long­time sup­ply-and-de­mand trends are shift­ing. Pro­duc­tion is de­clin­ing along the Gulf Coast, while ris­ing in seg­ments of the South­west and the Rock­ies. At the same time, in­dus­trial con­sump­tion in the Mid­west is down, while North­east and South­east power plants are de­mand­ing ever more fuel.

An­a­lysts said the lim­ited stor­age and pipe­line ca­pac­ity is the re­sult of a long pe­riod of un­der­in­vest­ment that be­gan when nat­u­ral gas prices col­lapsed in the mid-1980s. The price col­lapse also co­in­cided with thede­cli­ne­oftheRustBelt,promptin­gadrop-offind­e­mandthatleft­the coun­try with a sup­ply bub­ble.

Over time, there was a resur­gence in de­mand for nat­u­ral gas as a clean-burn­ing al­ter­na­tive to coal. By 2000, “the bub­ble had burst” and nat­u­ral gas prices more than dou­bled, said Kevin Pe­tak, di­rec­tor of en­ergy mod­el­ing and fore­cast­ing at Ar­ling­ton firm En­ergy and En­vi­ron­men­tal Anal­y­sis.

With the ex­cep­tion of a lull in 2002, when the econ­omy sput­tered, U.S. nat­u­ral gas prices have soared above his­tor­i­cal norms ever since.

Congress has been fo­cused in re­cent years on pro­pos­als to open up more pub­lic lands for nat­u­ral gas drilling. But an­a­lysts said th­ese ini­tia­tives alone will not help to lower prices or re­duce price volatil­ity if the coun­try’s ca­pac­ity to store and trans­port this fuel is not sig­nif­i­cantly in­creased as well.

Fed­er­alEn­er­gyReg­u­la­to­ryCom­mis­sion mem­ber Suedeen G. Kelly thinks in­dus­try is re­spond­ing to the need for more in­fra­struc­ture, with pro­pos­als to build pipe­lines, stor­age fa­cil­i­ties and liq­ue­fied nat­u­ral gas im­port­ter­mi­nal­sthat­should­hel­pal­le­vi­ate the strain. But “there al­ready is a need for more,” she said dur­ing a re­cent panel dis­cus­sion. Not ev­ery­one agrees. JamesTobin,an­an­a­lystatthefed­eral En­ergy In­for­ma­tion Ad­min­is­tra­tion (EIA) who re­cently ex­am­ined nat­u­ral gas stor­age trends go­ing­backto1998,saidin­dus­tryand gov­ern­ment of­fi­cials are un­der­es­ti­mat­ing the ca­pac­ity of the na­tion’s 394 un­der­ground stor­age fa­cil­i­ties, most of which are de­pleted nat­u­ral gas for­ma­tions. The EIA’s of­fi­cial es­ti­mate of to­tal U.S. nat­u­ral gas stor­age ca­pac­ity is 3.6 tril­lion cu­bic feet, while Mr. Tobin puts the fig­ure closer to 4 tril­lion cu­bic feet.

“I don’t think there’ll be any prob­lem with ca­pac­ity un­less some [win­ter] storm of the cen­tury hits, or some­thing like that,” he said.

At the start of Novem­ber, the un­of­fi­cial start of the win­ter heat­ing sea­son, in­ven­to­ries of nat­u­ral gas in un­der­ground­stor­age­fa­cil­i­tiesstood at 3.45 tril­lion cu­bic feet — the high­est level ever recorded by the gov­ern­ment. Thanks to a mild win­ter last year, there was 7 per­cent more nat­u­ral gas than the same time a year ago, and an­a­lysts were con­cerned the coun­try would fill up its stor­age ca­pac­ity, forc­ing nat­u­ral gas pro­duc­ers to cap wells.

This abun­dance helped hold down nat­u­ral gas prices at the end of sum­mer. But mar­ket psy­chol­ogy shifted in the fall. Even though there have been few cold snaps in the North­east and Mid­west, the fear of a de­mand surge that could shrink th­ese record in­ven­to­ries has been enough to make en­ergy traders ner­vous.

If the weather turns colder than nor­mal, “we can rip right through” the­ex­ist­ing­nat­u­ral­gas­sur­plus,said Fi­mat USA an­a­lyst John Kil­duff.

Duke En­ergy Gas Trans­mis­sion is em­bark­ing on a ma­jor ex­pan­sion of its stor­age fa­cil­i­ties along the Gulf Coast and is ex­plor­ing po­ten­tial stor­age sites in the Ap­palachian Basin, closer to the con­sum­ing mar­kets, ac­cord­ing to Mr. Fiedorek. It also has ap­proved sev­eral nat­u­ral gas pipe­line projects in the North­east and, pro­posed build­ing a 1,600mile pipe­line from West Texas to west­ern Penn­syl­va­nia with Cen­ter­Point En­ergy Gas Trans­mis­sion.

In an­other sign of re­duced bot­tle­neck­ing­to­come,acon­sor­tium­led by Cono­coPhillips, Kin­der Morgan En­ergy Part­ners LP and Sem­pra Pipe­lines & Stor­age plans to build the Rock­ies Ex­press pipe­line — a 1,663-milepro­ject,cost­ing$4bil­lion, to carry nat­u­ral gas from north­ern Colorado to east­ern Ohio by 2009.

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