Relief for consumers as natural-gas prices drop

Ten months after Katrina caused a price spike, electric utilities switch to natural gas.

Even with their air conditioners at full blast, some consumers might eventually be in for a surprise: relief on their energy bills.

The price of natural gas has fallen about 50 percent since hurricane Katrina drove up prices last fall. As oil prices hover around $70 a barrel, analysts say the spot price of natural gas now equals the energy potential of oil worth $41 a barrel – a differential that is spurring businesses and utilities to start switching over to the less costly fuel.

They are finding many eager sellers. Storage is at such high levels that some producers will either have to further reduce their prices orcurtail production. The high inventory volumes might also auger lower prices this winter, when natural-gas usage reaches its peak.

"If we have no hurricanes in the Gulf and say the summer is not particularly brutal, we'll go into the winter heating season with some relief," says Neil Gamson, who follows energy prices at the Energy Information Administration, the US government's official energy price forecaster.

Mild winter temperatures caused gas prices to fall while supplies increased as newly drilled wells in the West started production. After Katrina, the average price of natural gas topped out at close to $12 per thousand cubic feet, according to the EIA. Tuesday, the spot price hit $6.69 on the futures market.

The price break on natural gas occurs as a key House committee has fashioned a bill that would allow each coastal state to decide whether to permit natural gas drilling on the adjacent Outer Continental Shelf.

The US Minerals Management Service (MMS) estimates 420 trillion cubic feet of gas lies offshore – enough to supply the US with 14 to 16 years of gas at current usage levels. "The numbers we're using are very conservative," says Chris Tucker, a spokesman for Rep. John Peterson (R) of Pennsylvania, a co-sponsor of the legislation.

The planned expansion of liquefied natural gas (LNG) imports could also augment supplies. LNG is natural gas cooled into liquid form for transport in specially designed tanker ships.

Last week, the Federal Energy Regulatory Commission (FERC) approved the application for three new LNG terminals and additions to two others. The new facilities come at a time when imports of LNG are picking up in the US.

"People are expecting this to be a record year for LNG imports," says Dave Shin, chief economist at the American Gas Association (AGA) in Washington.

LNG comes with the additional burden of global competition. "If it's hotter in Spain, those consumers are willing to pay a premium to get LNG to their shores. So the issue now is even if we can site terminals in the US, will the LNG come?" says Shin.

This summer, the price of natural gas may face additional downward pressure simply because storage facilities, often underground salt domes, are filling up. Supplies are now 38 percent above the five year average, estimates the AGA.

"I know that no one wants to shut-in a well, get guys off the rig, absolutely not," says John Hammerschmidt, an energy analyst at Global Capital Management in Conshohocken, Pa. In rig-speak, to "shut-in" a well means to curtail production. "You want flow rates, that's what it's all about."

Gas supplies are glutted even though production in the Gulf of Mexico is about 1 billion cubic feet a day below pre- Katrina levels. "About two percent of our total natural gas production is still off," says Chris McGill, managing director of policy analysis at the AGA. "But who knows? That could be permanently lost."

Initially, consumers will benefit from lower gas prices as utilities and businesses start switching from coal or oil to natural gas. Ben Smith, president of First Enercast Financial, an energy forecasting service in Denver, says storage data reflects evidence that energy consumers are shifting to natural gas.

Homeowners may have to wait for the lower prices to work their way through the system, says Jim Owen, a spokesman for the Edison Electric Institute, a trade association, in Washington.

"If these lower gas prices were sustained for some time, at that point we would see a gradual easing in retail markets over a period of time," he says.

The low energy costs couldn't come at a better time for American consumers, who are still feeling the higher utility bills from last fall's energy spike.

"If prices could come down it would be terrific this winter for working people," says Mark Wolfe, head of the National Energy Assistance Directors' Association in Washington, which monitors energy aid to poor Americans.

"We're breaking all the records for people getting energy assistance to pay their bills."