Short Supply of Natural Gas Raises Economic Worries
By SIMON ROMERO
HOUSTON, June 16 <a href=www.nytimes.com>NYT— The economy has been cool, and so has the spring in much of the country. Nonetheless, the United States is facing its most severe shortage of natural gas in a quarter-century.
Industries like fertilizer and ammonia makers, which use gas to produce their goods, are already laying off workers. And experts warn that a warming trend, in the economy or the weather, could send prices spiking for the electricity that cools homes and runs every sort of business. Advertisement
"You would have thought that the last big upsurge in prices a couple of years ago was a tremendous wake-up call," said Gwyn Morgan, chief executive of EnCana, a Canadian company that is the largest independent natural gas producer and storage operator in North America. "But for most people it was not."
The market manipulation by companies like Enron has been blamed for much of the price surge of 2000 and 2001, which led to brownouts in parts of California and price spikes for electricity in much of the West and some of the Northeast. But now, like then, most analysts agree, the basic law of supply and demand is at work.
With natural gas promoted as a cleaner-burning fuel than oil or coal, nearly all the electric plants built since 1998 are designed to be fired mainly by gas. So demand is up. And while drilling has increased about 25 percent in the last year, much of it has been confined to old, overworked basins that are not as productive as they once were. Supplies, therefore, have not kept up.
In addition, analysts say that a failure to gauge supply needs and weather patterns accurately in an up-and-down economy has added to the squeeze on supplies.
Prices for natural gas have risen sharply in the last year, reaching a peak at more than $6 per million British thermal units, compared with about $3.65 a year earlier. Stored supplies of natural gas have fallen to the lowest level since the federal government began keeping records in 1976, with levels about 30 percent below the average for the last five years.
The effects of this latest surge in prices have led to renewed calls from the gas industry for the loosening of environmental restrictions on drilling and pipeline construction in the United States. Energy Secretary Spencer Abraham and the National Petroleum Council are convening a top-level meeting later this month to discuss the shortage and propose solutions.
Last week, the Federal Reserve chairman, Alan Greenspan, warned the House Energy and Commerce Committee that short supplies of natural gas could contribute to erosion in the economy. Mr. Greenspan emphasized the potentially important role that liquefied natural gas, in particular, could play in American energy imports.
Yet with the richest overseas stores of gas in distant regions like West Africa and Southeast Asia and the energy industry under technical and financial constraints, the difficulty of increasing imports remains considerable.
With few immediate answers at hand, industry executives and analysts talk of elevated natural gas prices for years to come.
"We're already facing the prospect of higher utility bills for consumers and higher energy costs for many businesses," Robert Allison, chief executive of Anadarko Petroleum, said in an interview. "The shortage is going to become a matter of exporting jobs to countries with cheaper natural gas."
The fertilizer industry has been particularly hard hit, since natural gas accounts for 90 percent of the cost of ammonia, the building block for nitrogen fertilizers. Robert C. Liuzzi, chief executive of CF Industries, a farm-supply cooperative based in Long Grove, Ill., said high natural gas prices were the most serious threat to the industry since the energy shocks of the 1970's.
Ammonia manufacturers are not faring any better, with factory closings becoming common. Mississippi Chemical, an ammonia company based in Yazoo City, Miss., filed for bankruptcy protection last month. The company idled a plant in Ohio, cut production at another in Tennessee and shut down a factory in Donaldsville, La., resulting in the loss of 24 jobs.
Charles O. Dunn, the chief executive, cited the "extreme increase and volatility in the price of domestic natural gas" as contributing to Mississippi Chemical's mounting financial losses.
Power generators that are capable of switching their plants to fuels like oil or coal are doing so to mitigate their dependence on gas. But analysts say that this, in turn, is contributing to higher prices for those fuels.
Short Supply of Natural Gas Raises Economic Worries
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Over all, about 23 percent of the nation's energy needs are met by natural gas. The United States is a large producer of natural gas, second to Russia, and 85 percent of the gas used here comes from domestic wells. But many parts of the country remain off-limits for drilling for environmental reasons.
Gaining access to these areas is a top priority of the energy industry, foreshadowing a more intense struggle between conservationists and natural gas companies. "The sorry thing is that there is gas to be found in this country but we can't get to it," said Mr. Allison of Anadarko, the nation's most active natural gas driller. Advertisement
Canada, with large reserves and geographic proximity, provides more than 90 percent of the natural gas exported to the United States. But Canadian imports are slowing, too, with some analysts expecting them to decline steadily in the next decade as demand grows at home.
That leaves the United States with the alternative of importing liquefied natural gas from other countries. Such gas, condensed into a liquid by chilling it, is transported by ship, and currently accounts for only 1 percent of the nation's gas imports.
Yet even raising today's imports to 3 percent of the total is not expected to happen anytime soon, because only a handful of terminals in the United States are capable of processing liquefied natural gas. The largest are in Everett, Mass., near Boston, and Lake Charles, La.
The costs involved in building the terminals, and the reluctance in many coastal areas to have large gasification installations in their vicinity, have kept many such projects from getting off the ground. So have fears that terminals could become targets of terrorism and financial concerns about the health and transparency of energy companies in the business world after Enron's collapse.
For instance, the El Paso Corporation, an energy trader based here, has had to abandon an ambitious project to use buoys and shipboard gasification technology to receive liquefied natural gas at offshore locations.
Yet numerous projects for liquefied natural gas terminals are under consideration, ranging from plans to reopen mothballed terminals built in response to the energy crises of the 1970's to more fanciful ideas. One Houston company, Crystal Energy, wants to use existing offshore facilities to build a receiving installation on the Southern California coast.
Several other terminals could be built and functioning within the next three to five years. Then, the United States may face the prospect of increased dependence on large, but sometimes politically problematic exporters like Nigeria, Algeria, Angola, Qatar, Venezuela and Indonesia.
"We're on the verge of discovering that natural gas is almost as important as oil for our energy supplies," said Amy M. Jaffe, associate director of Rice University's energy program. "Once we wake up to this, we'll have to deal with the geopolitical implications of importing natural gas from some of the more unsavory parts of the world."
In the meantime, about the only beneficiaries of the natural gas shortage are companies that can profit from the high prices for the fuel by producing or transporting it in North America. These include huge energy companies like BP, which are considerable gas producers, and a coterie of smaller companies that made a prescient bet on strong demand for natural gas.
Every 10-cent shift upward in gas prices, for instance, translates into a 4 percent gain in cash flow next year for Burlington Resources, which is based here. For EnCana, based in Calgary, Alberta, the same increase results in a 2.5 percent rise in cash flow, according to a study by Deutsche Bank.
"This is the strategy payoff we have been anticipating for many years," Mr. Morgan, EnCana's chief executive, said.