Natural gas supply lowest in 25 years-- Electric bills might rise if the economy, or the weather, heats up

By Simon Romero THE NEW YORK TIMES Wednesday, June 18, 2003

HOUSTON -- 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.

Basic industries, such as fertilizer and ammonia makers, that 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 cause a spike in prices for the electricity that cools homes and runs every sort of business.

"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 Corp., a Canadian company that is North America's largest independent natural gas producer. "But for most people it was not."

The market manipulation by companies such as Enron has gotten much of the blame for the price surge of 2000 and 2001. 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 of the electric plants built since 1998 are designed to be fired mainly by gas. So demand is up. Although drilling has increased about 25 percent in the past year, much of it has been confined to old, overworked basins that are not as productive as they once were. So supplies have not kept up.

Moreover, analysts say, a failure to accurately gauge supply needs in an up-and-down economy has added to the squeeze.

Prices for natural gas have almost doubled in the last year, peaking at more than $6 per million British thermal units, versus about $3.65 a year ago. Stored supplies have fallen to their lowest level since the government began keeping records in 1976. Utilities, including Austin Energy, are raising their rates as a result.

The cascading effects of the price surge have led to renewed calls from the gas industry for loosening environmental restrictions on drilling and pipeline construction. Energy Secretary Spencer Abraham and the National Petroleum Council are convening a summit later this month to discuss the shortage and solutions.

Last week, Federal Reserve Chairman Alan Greenspan made a rare appearance before the House Energy and Commerce Committee to warn that short supplies of natural gas could contribute to "erosion" in the economy. Greenspan emphasized the potentially important role that liquefied natural gas, in particular, could play in U.S. energy imports.

Yet with the richest overseas stores of gas in regions like West Africa and Southeast Asia, and the energy industry under tough technical and financial constraints, increasing imports is difficult.

With few immediate answers, industry executives and analysts see the prospect of elevated prices for years to come.

"We're already facing the prospect of higher utility bills for consumers and higher energy costs for many businesses," said Robert Allison, chief executive of Houston-based Anadarko Petroleum Corp. "The shortage is going to become a matter of exporting jobs to countries with cheaper natural gas."

Overall, the nation gets about 23 percent of its energy needs from natural gas. The United States is second only to Russia as a producer, 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 those areas is one of the energy industry's top priorities, foreshadowing a more intense dispute with conservationists.

Canada provides more than 90 percent of U.S. natural gas imports. But Canadian imports are slowing. That leaves the United States with one major alternative: importing liquefied natural gas. Such gas, condensed into a liquid, is transported by ship and accounts for 1 percent of the nation's gas imports.

Yet even doubling or tripling imports to 3 percent of the total is not expected anytime soon because only a handful of U.S. terminals are capable of processing liquefied natural gas.

The costs involved in building the terminals and the reluctance in many coastal areas to have large gasification installations have kept many projects from getting off the ground.

Exxon Corp., however, said Tuesday that it will spend up to $1 billion to build a liquefied natural gas terminal in Texas or elsewhere to receive imports. A spokesman said the company is already in discussions with some cities. Other companies are considering reopening mothballed terminals.

Several other terminals could be built and functioning within five years. Then, America will face the prospect of increasing its dependence on potentially large but politically problematic exporters such as Nigeria, 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 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."