Will This Bubble Ever Burst?

Houston wildcatter Bruce Anderson figured he paid his dues in 1986--when crashing oil prices forced him to cut back production, lay off workers, and hang on for dear life. Since then, crude has rebounded nicely. But for Anderson, who looks to natural gas for 40% of his production, this year seems too reminiscent of 1986. This time, though, the bugaboo is gas prices, which have plummeted to their lowest level since 1972. In mid-June, gas-pipeline giant Columbia Gas System Inc. announced the low prices may drive it into Chapter 11, and Anderson is hunkering down. "It's a nightmare," he says.

Maybe for producers. But it's a dream for consumers. Spot gas, after kissing $2 per thousand cubic feet (mcf) last December, in some areas is fetching less than $1 per mcf--the oil equivalent of $6 a barrel. The market is so saturated that the industry has abandoned its annual ritual of predicting an end to the gas "bubble," the surplus that has plagued the market for a decade. Now, even gas bulls see low prices lasting until 1993. And some gurus predict the glut will extend well beyond that (charts). Says Houston industry consultant Carol Freedenthal: "No one knows when it'll end."

FREE FALL. There's no rush, say big gas users such as utilities. Dual-fired generating plants can burn gas or coal, and guess what they're buying these days. In May and June, Houston Lighting & Power Co. upped its daily gas purchases by 50 million cu. ft., or 7.6%. The switch from coal saved $45 million, which it's rebating to customers. Other utilities are taking similar steps.

What a difference a year makes. After a freak warm winter stifled demand in early 1990, many producers hiked drilling, certain a normal season would revive America's hunger for gas. In all, 10,140 new wells were drilled last year, up 10.5% from 1989's 9,400, reports the American Gas Assn. But the weather turned warm again in January, leaving the system awash in supplies. An AGA survey suggests that newfound reserves, plus upward revisions to old fields, allowed companies to replace up to 120% of last year's production of 17.5 trillion cu. ft. (tcf). Producers that had been holding back supplies gave up and began flooding the market. After holding at $1.78 per mcf in January, median spot prices tumbled to around $1.30 for the rest of the first quarter--even though demand was up 7%, to 6.1 tcf.

Smaller players charge that the majors have aggravated the price slump by continuing to pump gas into a swamped market. Houston independent producer Anadarko Petroleum Corp. sought to shore things up by curbing output from its Matagorda Island facility in the Gulf of Mexico. But Anadarko says majority partners in the project, led by Amoco Corp., nixed the plan. "They're giving it away to keep market share," says a spokesman. In mid-June, prices fell anew--to about $1.10 per mcf.

Columbia, a gas reseller, is the biggest casualty so far--but small producers are also taking it on the chin. Stunned by falling prices, many have cut back drilling. Only 881 rigs are running in the U. S. today, vs. 1,021 a year ago, reports Houston oil-field service company Baker Hughes Inc.

POWER DRILLS. Even a drilling slowdown may not cut the surplus by much, though. Power producers are signing more long-term deals--paying a premium for secure supplies. And that premium, anywhere from a few cents to $1 per mcf over spot, may keep drilling fairly active. More gas is pouring in from Canada, which met some 7% of U. S. demand last year. Then there's a hefty tax credit for producing gas from coal beds, which adds to the glut. Benjamin Schlesinger, a natural-gas consultant, says that while prices could pierce $2 per mcf in a cold winter, gas is so abundant they will average only $1.50 to $1.80 per mcf for the next few years.

If that's true, prices should still be high enough for all but the most marginal producers to survive. But there's little reason to expect a boom. A new study by Enron Corp., Houston, puts recoverable U. S. gas reserves at 1,000 tcf--50 years' supply. So as soon as markets start to tighten, the drilling rigs could rush back out and tap this vast reserve, driving prices down again for the second half of the 1990s. While that may cause bad dreams in the gas patch, it augurs well for consumers, who may be warming themselves with cheap gas for years to come.

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