The Pressure Is Building on Natural Gas

When the U.S. entered last winter with unusually low amounts of natural gas in storage, many analysts predicted that rising demand in the face of supertight supply would lead to strato-spheric prices. Boy, were they right. Last year, natural-gas prices on the New York Mercantile Exchange (NYMEX) quadrupled, to nearly $10 per thousand cubic feet (Mcf) in December, as consumer utility bills hit unheard-of levels.

Now, with natural-gas prices rising again after having settled back to about $5 in March, many observers are predicting an encore. Indeed, so far in April, prices have climbed about 10%, to $5.55. A scorching summer could bring further trouble. The reason for worry: With producers still playing catch-up on supply, current inventories of natural gas sit at record lows.

BAD WINTER? As the industry begins its critical April-to-October stretch, when storage tanks are refilled for the next winter, natural-gas inventories stand at 627 billion cubic feet (Bcf). That's 39% below a year ago, and the lowest on record at the start of a refill season, according to the Energy Dept.'s Energy Information Agency (EIA). At that level, it will be difficult to shore up reserves in time for winter. Last refill season, storage levels were boosted only from 1.15 trillion cubic feet (Tcf) to 2.7 Tcf. That's well below the 3.1-Tcf cushion normally built up to get through even a mild winter. "We really don't have enough gas reserves or enough [production capacity] to meet demand," says Apache Corp (APA ). Chairman and Chief Executive Raymond Plank.

The deficit could lead to price spikes as early as this summer. California's energy crisis, combined with an extremely hot summer in that state and others, such as Texas, that consume large quantities of gas-fired electricity, could send prices way up. The increased use of gas to fuel power plants has boosted demand. Hot weather would make it even harder to meet summer requirements while filling storage bins for the winter. If summer is hot, warns Enron Corp. (ENE ) CEO Jeffrey K. Skilling, "I could easily conceive of [spot prices] something north of $10 or even $15."

After easing during the fall, many analysts say spot prices could spike back to the $7-to-$10 range this winter. But the futures markets are projecting a price of about $6 next January. The EIA estimates natural-gas prices for residential consumers could jump about 26% this winter, to $9.77 per Mcf, following a 46% rise last winter. "We see natural-gas prices as being recession-proof in 2001," says Robert L. Christensen Jr., senior vice-president at FAC/Equities in New York.

That's despite an anticipated easing of demand this year. The EIA says natural-gas demand will grow only 2.3% in 2001 vs. 4.4% last year. The slower growth will take some pressure off, but weak production means prices will remain strong. A recent Lehman Brothers Inc. survey of the 50 producers that account for 70% of the U.S. natural-gas supply shows that production fell 2.9% in 1999 and another 1.7% in 2000. Lehman analyst Thomas R. Driscoll estimates the group will log a mere 1.7% production gain this year even though 944 rigs are drilling for gas in the U.S., an increase of 54.8% over a year ago.

More drilling doesn't necessarily add up to immediate supply. Industry officials say it takes up to 18 months after the start of drilling before new gas arrives in the market. Another problem: It's getting harder to squeeze production from maturing U.S. properties. Analysts figure it will be two to three years before production is up to reasonable levels. The industry is "running as fast as humanly possible to bring more gas into the market," says Richard J. Sharples, president of Anadarko Energy Services Co. For now, high natural-gas prices are here to stay.

By Stephanie Anderson Forest in Dallas, with bureau reports

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