www.businessweek.com FEBRUARY 28, 2003 NEWS ANALYSIS

Philip Flynn is staring at his computer screen in disbelief these days. The energy analyst at Chicago-based Alaron Trading Corp. watched the price of natural gas nearly double in three business days, hitting $9.70 per million Btus at the New York Mercantile Exchange on Feb. 25. That's four times what natural gas cost at this time last year. That's not the worst: Spot prices for gas deliveries to Texas and New York hit about $25 per million Btus on the same day. "There have been entire years when prices haven't risen this much," Flynn says. Between fear of war in the Middle East, an oil strike in Venezuela, and cold weather across the country, energy prices are surging across the board. But no commodity has risen faster than natural gas. While the price of oil is tied as much to foreign policy as it is to the number of drilling rigs in operation, the natural gas price spike is almost entirely a homegrown phenomenon. "SEMI-CRISIS BREWING."  The problem: Even without the recent cold snap, the energy industry isn't producing enough gas. "The gas-supply picture is just barely keeping up with demand," says Lee Gooch, chairman of the Process Gas Consumers Group, which represents large industrial consumers. "We've got a semi-crisis brewing, and it's going to take a while to turn that around." Consumers are feeling the pinch. Although the three-day jump won't affect most buyers if it proves temporary, gas prices had already soared, rising from about $2.20 per million Btus in early 2002 to roughly $6 by early February. Half of all U.S. homes are heated by natural gas. The U.S. Energy Information Administration predicts that a typical residential customer in the Midwest will spend about $762 on gas this winter, a 28% increase from last year. Big companies are also getting hit. U.S. Steel Corp. (X ) Chairman Thomas J. Usher told investors recently that higher gas prices would cost it more than $50 million a year, a big part of why he has been seeking price hikes from carmakers. PASSING UP OPPORTUNITIES.  Still, the natural-gas industry and its customers aren't in quite the bind that soaring prices seem to suggest. A large reason for the price runup stems from a good old-fashioned Wall Street mini-panic. Traders who bet that the price would decline have had to buy gas to cover their short positions, putting sharp upward pressure on prices. Since most utilities and industrial consumers buy natural gas under long-term contracts, few will actually pay the recent astronomically high prices. Nor is access to promising drilling rights the real problem. On the same day prices soared to record levels, energy executives testifying before the Senate Energy & Natural Resources Committee called for the federal government to ease restrictions on drilling, particularly on Alaska's North Slope, in the Rockies, and offshore on the East and West Coasts. However, drilling restrictions hardly seem to have crimped the industry. Indeed, many companies have spent the past several years passing on new drilling opportunities. The reason: After a big price spurt in 2000 and 2001, most energy companies correctly predicted that gas prices would fall, in step with the weakening U.S. economy. Many cut back on developing new wells. The result: by some estimates, a 5% dip in U.S. natural gas production last year, the largest such decline in 16 years. FLOWING TOGETHER.  Gas producers didn't expect that prices would recover so quickly in 2002. Despite economic weakness, demand stayed strong as new power plants fired by natural gas came on line. Such plants now account for a quarter of gas consumption, nearly twice their level a decade ago. That sent prices heading back up again, setting the stage for a big price surge when the weather turned unexpectedly frigid in the Northeast and Midwest. The squeeze on supplies isn't likely to ease this year. Although the number of rigs drilling for natural gas in the U.S. has been creeping up, at 767 it's still 30% below the all-time high in July, 2001. Natural-gas prices are expected to average well above $4 per million Btus this year, below current prices but still twice historical averages. "Normally, when you have prices this high, you see a big increase in drilling activity," notes Bruce Henning, a consultant with Energy & Environmental Analysis Inc. in Arlington, Va. "We haven't seen it." What's holding up new drilling? Industry consolidation, for one. Recently merged entities such as ChevronTexaco Corp. (CVX ) and ConocoPhillips (COP ) have lower drilling budgets than the individual companies did pre-merger. Large producers such as ExxonMobil (XOM ) and BP PLC (BP ) are more inclined to merge and cut costs than invest the time and money to bring new fields on line. Says Paul Ziff, an energy consultant with Ziff Energy Group: "Those big fields take a long time to develop." UNDER PRESSURE.  The collapse of the energy-trading industry has also hurt. Enron Corp. and others helped small energy companies raise capital by selling their future production under long-term contracts. Financial institutions such as Bank of America (BAC ) and UBS Warburg have entered the energy-trading business, but they tend to be more cautious, says Gary Ackerman, executive director of the Western Power Trading Forum, an industry trade group. "Few deals are being done, even though the timing is perfect," Ackerman says. Banks, investors, and credit-rating agencies, meanwhile, are putting pressure on energy companies to reduce their debt and boost their returns on investment. "You've got a combination of people telling you: 'Don't go borrowing money to drill,'" says John D. Schiller Jr., executive vice-president of exploration and production at Ocean Energy Inc., a Houston producer that recently agreed to sell itself to Devon Energy Corp. (DVN ), in part to take advantage of today's high commodity prices. Those cautious voices aren't likely to quiet down anytime soon.

By Christopher Palmeri in Los Angeles, with Stephanie Anderson Forest in Dallas, Michael Arndt in Chicago, Alexandra Starr in Washington, and Peter Coy in New York

www.heraldtribune.com The Associated Press

Crude oil futures ended lower Thursday after soaring to a 12-year high, as early panic buying sparked by concerns over tight supplies and a looming war with Iraq gave way to panic selling. "A lot of it was profit taking," said Bill O'Grady, an energy analyst at A.G. Edwards in St. Louis. "It highlights the extreme uncertainty in the market." At the New York Mercantile Exchange, front-month April crude oil futures climbed as much as $2 to $39.99 a barrel, the highest level since October 1990, when prices set a record high of $41.15 after Iraq's invasion of Kuwait. The contract settled at $37.20 a barrel, down 50 cents. March heating oil futures ended down 0.06 cent at $1.1543 a gallon, while March gasoline settled at $1.0188 a gallon, down 0.03 cent. March heating oil and gasoline futures expire Friday, the last trading day of the month. On London's International Petroleum Exchange, the volatility was less extreme. April Brent ended down three cents at $33.04 a barrel. Natural gas for March delivery rose 9.5 cents to settle at $7.485 per 1,000 cubic feet. O'Grady said that crude is likely to recover Friday as traders cover short positions ahead of the weekend. "I cannot imagine anyone carrying shorts over the weekend," he said. "We'll probably see the market do better going into tomorrow's close." The early gains came amid concerns over tight U.S. crude inventories - now at their lowest level since 1975 thanks to cold weather and a strike in Venezuela - and growing jitters over a possible U.S.-led attack on Iraq, traders said. President Bush's tough speech on Iraq Wednesday night, along with indications that the United States might win U.N. approval for a second resolution on Iraq, heightened fears that a war on Iraq may be inevitable. But while worries about an Iraq war continue to support prices, bears found some support in a report that indicated Iraq may consider destroying its Al Samoud missiles to try to avert an attack. Iraqi officials had no comment on the issue, but Egypt's Middle East News Agency quoted unidentified sources in Baghdad as saying the step was intended to deprive Washington of an excuse to attack. Chief weapons inspector Hans Blix sent his top deputy to Baghdad, saying the envoy would be discussing with the Iraqis "the pace of the destruction " of the Al Samoud 2. There was also concern that prices have reached an unsustainably high level, which could prompt the White House to tap the nation's Strategic Petroleum Reserve. The Bush administration has so far resisted calls for a release of oil from the SPR, saying the reserve, which holds 600 million barrels of crude oil in salt along the Gulf Coast, is designed to be used in case of war or severe supply disruptions. Analysts say the White House is likely to order a release when a war begins. Secretary of Energy Spencer Abraham said earlier this week the U.S. would act quickly to offset any supply disruption caused by a war. Traders worry that an attack on Iraq would disrupt the country's oil exports and could potentially spill over to halt oil exports from other Persian Gulf countries. Analysts say that the release of oil from the emergency reserve coupled with a smooth victory in Iraq could lead to a sharp decline in oil prices, much as during the last Persian Gulf War.

Last modified: February 27. 2003 6:48PM

reuters.com Thu February 27, 2003 09:46 PM ET By Pascal Fletcher

CARACAS, Venezuela (Reuters) - Venezuelan President Hugo Chavez's negotiators failed to show up for talks with the opposition on Thursday, and foes accused the leftist leader of resisting efforts to discuss how to end a long-running political conflict.

Government negotiators cited security concerns in explaining why they stayed away from a second consecutive day of talks being brokered by Organization of American States Secretary General Cesar Gaviria.

Angry opposition representatives accused the government of deliberately stalling the talks to thrash out an agreement on elections to end the feud between Chavez and his foes in the world's No. 5 oil exporter.

"Once again we were left waiting for the government. ... You can see that there isn't much interest," negotiator and anti-Chavez union leader Manuel Cova told Reuters.

Chavez, a populist former paratrooper who was first elected in 1998 and survived a coup last year, has been resisting pressure to step down. His opponents accuse him of ruling like a dictator and of trying to install Cuban-style communism in oil-rich Venezuela.

The government delegation did not speak to reporters Thursday. But sources close to the talks said they had referred to anti-government student demonstrators outside the talks venue in Caracas as the reason for not turning up.

"They argued security problems," one source, who asked not to be identified, told Reuters. The talks were due to be held at the Caracas headquarters of the Latin American Economic System, a regional economic advisory body of 28 countries.

On Wednesday, the government used a similar argument to stay away after several thousand anti-Chavez protesters marched past the building where the negotiations, which have dragged on since late last year, were scheduled to take place.

Negotiations were scheduled for Friday, sources said.

The opposition wants the president to agree to elections before or on Aug. 19. The government has refused to set a firm day for elections. Chavez's term legally ends in 2007.

Tensions have been running high since the arrest last week of anti-Chavez business leader Carlos Fernandez, one of the organizers of a recent two-month strike that slashed oil output and pushed Venezuela deeper into recession. He is now under house arrest.

Chavez, who calls his foes "terrorists" and "coup mongers," has ordered the arrest of other alleged strike leaders.

SECURITY FEARS

Security was tightened around foreign embassies after bomb blasts early Tuesday badly damaged the Spanish embassy cooperation office and the Colombian consulate in Caracas.

Tuesday's bombings came after Chavez sharply criticized Colombia, Spain and the United States on Sunday, accusing them of meddling in his country's crisis.

His government denied any link between his remarks and the blasts. No one claimed responsibility for the bombings but leaflets signed by a radical pro-Chavez group were found at the scene. They expressed support for Chavez's "revolution."

The U.S. embassy was closed to the public on Thursday after officials said Wednesday they had received a threat. U.S. officials said the embassy would re-open Friday.

A telephone bomb threat Thursday forced the evacuation of the control tower and other parts of Maiquetia international airport that serves Caracas. Flights were delayed, airport officials said. No explosive device was found.

news.ft.com By Richard Lapper Published: February 28 2003 4:00 | Last Updated: February 28 2003 4:00

The US could have helped "avert or at least temper" the crises in Argentina and Venezuela, according to a report published today by a Washington-based Latin American think-tank.

Although it welcomes the advances on the trade front, the Inter-American Dialogue says that Latin Americans believe the US has "lost interest in the region" and sharply criticises the Bush administration's record there.

IAD says US policymakers must give greater priority to "full-blown crises" that could take "years to resolve".

www.adn.com By H. JOSEF HEBERT, Associated Press

WASHINGTON (February 27, 3:30 p.m. AST) - Venezuela's energy minister gave an optimistic forecast Thursday for resumption of oil shipments to the United States, saying the country was expected to boost production to 2.4 million barrels within a few weeks.

Rafael Ramirez, Venezuela's minister in charge of energy and mines, told a conference that oil production, at a virtual standstill in January, recovered dramatically in February.

Ramirez briefed Energy Department officials and said they were "pleasantly surprised by our recovery."

Energy Secretary Spencer Abraham told a Senate hearing Wednesday that while the crisis in Venezuela appeared to be ending, it could take 60 to 90 days before oil imports from the South American country would get back to normal.

Energy Department spokeswoman Jeanne Lopatto declined to characterize the meeting. "We appreciated their sharing the information with us," she said.

Ramirez estimated that Venezuela was exporting about 1.5 million barrels a day, about half its average daily export last year. He also said gasoline exports from Venezuelan refineries were likely to resume in mid-March.

The Venezuelan government's past assessments on the recovery of the country's oil industry have been disputed by critics, who have said they are overly optimistic.

Political turmoil and strikes beginning in December paralyzed the industry and brought Venezuela's oil exports to a halt.

The shutoff of Venezuelan supplies - along with nervousness about a possible war with Iraq - have caused crude oil prices, as well as the cost of gasoline and heating oil, to soar.

The world's fifth largest oil producer, Venezuela is a major source of oil for the United States, accounting for about 14 percent of U.S. oil imports last year, or about 1.3 million barrels of crude and refined gasoline.

During a meeting Thursday at Inter-American Dialogue, a Washington group specializing in Western Hemisphere affairs, Ramirez said oil shipments in the eastern part of Venezuela have nearly gotten back to normal in recent weeks. He said ExxonMobil and Valero Energy are inspecting shipping facilities in anticipation of resuming shipments into the United States.

Ramirez said his government expects oil production to reach the Organization of Petroleum Exporting Countries' quota by the end of the month. He said production has risen from 150,000 barrels a day in early January to just over 2 million barrels a day. He said production is expected to reach 2.9 million barrels a day by the end of March.