Natural gas in high demand, low supply

For all the right reasons, American consumers and power companies in recent years made natural gas their fuel of choice. It's clean-burning, it's efficient, and suppliers say there is plenty in the ground, too.

But at a time when 70 percent of new homes are turning to natural gas for heat, and electricity suppliers across the country want to build hundreds of new gas-fired power plants, it doesn't take a fossil-fuel expert to see that demand is outpacing supply.

All it takes is the courage to open the monthly heating bill.

A severe natural-gas shortage has been ducked this winter, yet prices remain more than double levels of a year ago.

Looking ahead further, the question energy experts are asking is whether new supplies can be brought to market in time to meet growing demand from places like California - which is counting on gas-fired plants to end its power crisis.

"Shortages occur when you can't get it out of the ground fast enough to satisfy demand," says Jim Jensen, a veteran energy consultant in Wellesley, Mass. "We have fallen a bit behind. We are likely for a period to have a tight market."

For the industry, higher gas prices are a crucial support for the necessary billions in investments. Already, there's a surge in drilling and renewed talk of a pipeline to bring gas from Alaska and Canada's Mackenzie Delta.

But the high prices are rattling Washington.

Federal Reserve Chairman Alan Greenspan spoke of the damage to the economy from high gas prices last Wednesday. The White House, meanwhile, has set up a task force on energy under Vice President Dick Cheney.

In Congress, various energy hearings are under way, and Sen. Frank Murkowski (R) of Alaska last week introduced a bill that promotes US gas production.

While supplies remain tight, gas prices have dropped from about $10 per thousand cubic feet (Mcf) in December to about $5 now. But even as winter draws to an end, experts don't foresee prices retreating any time soon to the roughly $2 level of a year ago.

Perhaps it will head to around $4 plus, says Paul Ziff, head of Ziff Energy Group in Houston and Calgary, Alberta.

That sounds like cold comfort for the nearly 175 million Americans relying on natural gas for space heating, water heating, cooking, and clothes drying.

But that price level could be just what the industry needs to encourage development of new supplies.

Optimists in the gas industry figure the supply will grow with high prices. Pessimists suspect growth will not be fast enough to meet demand - which the American Gas Association says could rise 67 percent by 2020.

Getting back to a "normal" demand-supply position for natural gas could take 2-1/2 to 4 years, estimates Jerry Jordan, chairman of the Independent Petroleum Association of America, a trade group representing most firms drilling for gas in the US.

Much, he says, depends on whether the Bush administration allows drilling in nonpark lands owned by the federal government, particularly in Rocky Mountain states. Before leaving office, President Clinton tried to put many of those lands off limits to drilling.

Today's high prices open the possibility of piping in gas from Alaska and northern Canada in perhaps seven years - an unfulfilled dream of petroleum companies that goes back to the 1970s.

There could also be an earlier expansion of liquified natural gas (LNG) supplies from Trinidad and other sources abroad.

Paul Wilkinson, vice president of policy analysis at the American Gas Association, figures it will take at least a $3-per-Mcf price to make delivery of Alaskan gas and LNG economically viable.

Meanwhile, the number of oil and gas wells drilled per year will have to double to 50,000 to keep up with growing demand, estimates one industry study released last week.

Drilling fell sharply when the price of oil collapsed in 1998-99, from 544 onshore gas-drilling rigs in 1997 to 318 early in 1999.

Now, "rigs are coming out of the woodworks," notes Mr. Ziff, with 845 in operation.

Nonetheless, it will take time to restore a better balance. The concern about long-term supply arises from planned gas-fueled power plants. These plants, compared with coal-fueled plants, are cheap and quick to build and easy on the environment.

Basically, these new "combined-cycle" gas-fired plants are jet engines. They operate at high temperatures, drawing power from both the original burn and the heat of the exhaust.

At present, about 16 percent of the nation's electricity is supplied by gas, but that number is set to rise as new plants are built.

Thomas Stauffer, a Washington consultant, laments that some new gas plants are not built with the capacity to switch to oil, a feature which gives utilities the option of switching to the cheaper fuel. "That is just dumb," he says. "This market mechanism to protect the consumer on prices has been effectively crippled."

(c) Copyright 2001. The Christian Science Publishing Society