- The Washington Times - Monday, December 25, 2006

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, highlights another knotty market force at work, analysts and executives say.

A dearth of natural gas storage and pipeline capacity, particularly in 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, chief executive officer of Falcon Gas Storage Co. But as a result of rising demand and insufficient investment 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 late last month. 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 could very well lose market share to 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 is spun off from parent Duke Energy 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 the decline of the Rust Belt, prompting a drop-off in demand that left the 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.

Federal Energy Regulatory Commission 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 import terminals that should help alleviate the strain. But “there already is a need for more,” she said during a recent panel discussion.

Not everyone agrees.

James Tobin, an analyst at the federal Energy Information Administration (EIA) who recently examined natural gas storage trends going back to 1998, said industry and 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 last month, the unofficial start of the winter heating season, inventories of natural gas in underground storage facilities stood 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” the existing natural gas surplus, 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 1,600-mile pipeline from West Texas to western Pennsylvania with CenterPoint Energy Gas Transmission.

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

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