HOUSTON (AP) — America’s plan to use more natural gas to
run power plants, make chemicals, drive vehicles and heat homes may not
go as smoothly as expected.
There’s plenty of natural gas in the
ground, everyone seems to agree. But the harsh weather this winter shows
there are obstacles to producing it, and more pipelines have to be
built.
The bitter temperatures boosted demand for natural gas to
heat homes and businesses. But wells in some places literally froze,
making it difficult for some drillers to keep gas flowing. And the high
demand clogged pipelines, so even when there was enough production, the
gas couldn’t get where it needed to go.
Shortages cropped up, and
prices in some places soared to record levels. Californians and Texans
were asked to reduce their power consumption because utilities were
running low on gas to run power plants. Montana State University in
Billings had to cancel classes for a day because of a natural gas
shortage.
"We struggled to get the supply there as quickly as we
needed," said Colin Parfitt, who runs Chevron’s global trading
operations, at an industry conference here last week. "It’s a reminder
there will be volatility in our market."
The problems came as a
shock because the natural gas market was thought to have escaped from
the volatility of the past — drillers have discovered enormous amounts
of natural gas, production is at record levels and prices had been
relatively steady.
Based on that promise of ample supplies and
stable prices, the nation has geared up to use more and more natural
gas. Utilities are abandoning coal and nuclear power for gas, chemical
companies that use natural gas as a feedstock have re-opened old plants
and are planning new ones, export facilities are being built, and trucks
and locomotives are even beginning to switch to natural gas.
Anthony
Yuen, a natural gas analyst at Citi, predicts demand will "mushroom"
staring next year and grow 33 percent by 2020 from last year’s 73
billion cubic feet a day.
But now there is concern about whether
the natural gas industry can produce all of the gas their old and new
customers need, and deliver it to them through a pipeline system that
hasn’t been able to keep up with the new demand.
"They can," said
Bob MacKnight, a director at the research and analysis firm IHS at the
firm’s annual CERAWeek energy conference. "The key question is, ‘Will
they?’"
Drillers have suffered significant losses in recent years
because of persistently low prices. In 2012, natural gas fell below $2
for the first time in a decade. Many companies curtailed gas production
and switched to drilling for oil, which is more profitable because of
high prices. Natural gas production rose just 1.5 percent last year,
while oil production in the U.S. rose 15 percent to 7.4 million barrels a
day.
So far this year, the natural gas futures price has averaged
$4.82 per 1,000 cubic feet. That’s 20 percent higher than last year’s
average and 70 percent higher than 2012.
Retail prices are still
far below where they were in the early and middle 2000s. But the average
residential price is expected to rise 12 percent this year to $11.56
per 1,000 cubic feet, according to the Energy Department. It would be
the first increase in residential prices since 2008.
But drilling
companies aren’t yet convinced that higher natural gas prices will last.
Andrew Mackenzie, CEO of BHP Billiton, the Australian mining and oil
and gas giant, said in an interview at annual CERAWeek energy conference
hosted by research and analysis firm IHS, that he will keep all of his
25 U.S.-based rigs probing for oil. "We have to worry about the
sustainability of current (gas) prices," he said.
Citi’s Yuen
predicts that because increased demand and continued modest production
growth, prices will rise another 15 percent at least. Toward the end of
the decade, prices will average around $5.50, a level drillers would be
more comfortable with.
The industry also has to build the
pipelines to get the gas from the new places it is being produced, such
as Western Pennsylvania, to its new customers. Pipeline constraints and
other infrastructure problems helped create some of the supply problems
this winter that sent prices gyrating so violently one Wall Street
analyst called them "untradeable."
Between January 1 and
mid-February, prices for immediate delivery at the natural gas hub that
serves Boston averaged $22.53 per thousand cubic feet, about 4 times
higher than the national benchmark, and a record high, according to the
Energy Department. For a period during some cold snaps, New York and
other East Coast markets saw prices spike as high as $120 per 1,000
cubic feet, according to Platts, an energy information provider. That’s
equivalent to oil at more than $700 per barrel.
Even while prices
near cities were soaring over $100, the drillers just a few hours’ drive
away were selling gas at less than $4 because there was no room on the
pipelines.
"It’s a question of getting to market," said Greg Ebel,
CEO of Spectra Energy, a pipeline company that moves one-fifth of the
gas used in the U.S. every day. "How are we going to actually deliver
the supply needed, that’s a real challenge for us."
The industry
is planning several terminals to export natural gas to customers in Asia
and Europe, where gas remains much more expensive than in the U.S. The
terminals will be built where pipeline constraints are not a problem,
but the terminals approved by the Energy Department so far would
increase demand by 13 percent.
Ebel and a panel of gas executives
speaking here said the situation would have been worse had this frigid
winter come five or ten years ago. "I think the Northeast was pretty
lucky this winter," Ebel said.
Still, natural gas storage levels
are lower than they’ve been since 2008. That could mean even higher
prices are on their way, either this summer if temperatures rise or this
winter if drillers don’t re-fill storage caverns.
Prices might
even rise high enough to get drillers interested in gas again. "If this
summer starts hot you will see some interesting situations," Ebel said.
Jonathan Fahey can be reached at http://twitter.com/JonathanFahey .
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