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THE NEW YORK TIMES: Experts: Natural Gas Economy Losing Steam

Experts: Natural Gas Economy Losing Steam

By THE ASSOCIATED PRESS
Published: April 30, 2006

Filed at 9:40 a.m. ET

BOSTON (AP) — On the brink of the 21st century, a group of energy experts peered into the future of natural gas, and what they saw was quite rosy — and quite wrong.

To satisfy growing demand, producers could crank out a third more natural gas over the next decade at ''competitive prices.'' It could ''power our economy'' for decades beyond. Or so said the National Petroleum Council in its 1999 report.

But natural gas prices soon headed skyward, with prices charged by producers spiking late last year at nearly five times 1999 levels. This past winter, though starting off warm, saw the average gas-heating household spend a record $867, a 17 percent increase, according to federal data. As for that predicted robust supply, the country's annual gas output has strangely slipped by 3 percent over the past six years.

Something is broken in the economics of natural gas, say people inside and outside the industry. The bright dream of an economy built squarely on clean-burning natural gas is slowly deflating. Although we still derive almost a quarter of the country's energy from natural gas, its share will slip in coming decades, federal forecasters now say.

''What's going on now is so dysfunctional, it is really remarkable,'' says industry consultant Jim Choukas-Bradley.

Retired Yale economist Paul MacAvoy says price jerks and fuel crimps could soon rival California's electricity nightmare of 2000-2001. ''Everything that has gone wrong in electric power is going to go wrong with natural gas, unless we do something,'' he says. ''It's just a few miles down the road.''

What went so wrong with natural gas?

The industry largely blames old fields and self-defeating government policy, and such explanations are widely accepted. The trouble is, they don't explain the breakdown very well.

Skeptics are beginning to suspect other powerful forces — ones at work within the industry itself.

Some consumers simply look to their gut and blame the industry.

After 26 years, retirees Anna and Frank Siracusa are selling their nine-room, gas-heated home in Methuen, Mass., for something smaller. At age 72, they're tired of turning down the thermostat and piling on sweaters each winter.

''Someone is ripping us off,'' grumbles Mrs. Siracusa.

The level of discontent even makes the industry nervous. ''We're good corporate citizens. We'd like to have prices at a level where people and congressmen are not screaming all the time,'' says R. Skip Horvath, president of the National Gas Supply Association.

Industry leaders say they're trying to fix things, but declining gas fields and harder-to-reach new ones are limiting output. ''You've got to drill more wells, you've got to run faster, just to replace what has declined,'' says Bobby Shackouls, CEO of producer Burlington Resources and past chairman of the Petroleum Council.

While government policy turned less-polluting natural gas into the fuel of choice for new electric plants in the late 1990s, federal rules kept drillers away from vast stretches of public land, the industry complains. Then came last year's hurricanes.

However, most drilling restrictions were imposed years ago and added no new impediments to output during the price run-up, say federal energy officials. And the hurricanes only added the latest insult to a market with much bigger, older injuries.

Also, other trends should have cooled off prices. Yes, gas-fired generators did use almost 1 trillion more cubic feet of natural gas last year than in 1999. But at the same time, factories cut back, using almost 1.5 trillion less, federal data show.

The country is not running out either. There's enough natural gas to last beyond 65 years — much longer than oil, according to the best forecasts.

Despite the federal barriers to drilling, the amount of economical, ready-to-capture gas — under existing wells within reach of pipelines — rose 15 percent during the four years ending in 2004, according to the latest federal data. The American Gas Association, a group of utilities, has made a preliminary estimate of another 4 percent rise last year.

''There's a lot of natural gas in the world,'' says Jerry Langdon, an executive at producer and marketer Reliant Energy.

Why, then, isn't it reaching users?

Despite their protests, maybe some producers aren't really trying, industry critics suspect. Maybe they're happy to take it easy and rake in record yearly profits. Many natural gas producers are the same companies benefiting from rocketing gasoline prices in recent years — familiar petroleum names like Exxon Mobil, Chevron, Shell and BP.

Drivers, of course, can respond immediately to high prices by traveling less. It's harder for people to turn down their natural-gas heat. ''As soon as companies that control the resource figure out how to keep prices high, they'll do it, and I believe that's what were seeing in gas,'' says Ezra Hausman, analyst for Synapse Energy Economics in Cambridge, Mass.

Some Midwestern cities are accusing producers of doing it by collusion. In an antitrust lawsuit, they suggest that producers have reached either a secret agreement or tacit understanding to bottle up production.

''I think the increase in prices is a designed thing,'' says Charles Wheatley, a lawyer for the 18 communities from Texas to Indiana suing five leading gas producers in federal court.

They haven't found a smoking gun proving that. Yet, in Associated Press interviews, some industry executives acknowledge that, during their 1999 sessions, members of the Petroleum Council talked privately of a supply and price crunch in the near future — purportedly as a result of external factors.

Why, then, didn't they warn people? Former council leaders indicated that they wanted to keep pressure on demand. ''We needed to give comfort to our customers that gas was going to be available,'' says Joe Foster, a retired gas executive who was council chairman in 1999.

Shackouls, his successor, puts it this way: ''We were doing it to grease our own wheels.''

In the end, the council issued its reassuring report, and demand stayed strong.

On the other hand, industry leaders insist that collusion to sit on supplies cannot happen. After all, the five leading producers supply less than a fifth of domestic natural gas. So if they were to charge unjustifiable prices, smaller ones could undersell them, right?

Maybe not, if producers are more unified than they seem. Many small producers own rights, not rigs. They take a back seat to bigger companies that actually do the drilling under joint ventures, shared leases and royalty agreements.

Former federal energy regulator John Wilson estimates that the five producers named in the antitrust lawsuit can influence most domestic output through such arrangements, without changing their official production figures.

''Prices have stayed up because people in control of supply decided they could keep them up,'' says Wilson, who has supported the lawsuit with his analysis.

''That's not how we operate,'' answers Bob Davis, a spokesman for lead defendant Exxon Mobil Corp. ''This concept … is simply ridiculous.''

And ridiculous it would have been a generation ago, when government regulators set prices across the whole marketplace.

Since the 1990s, the marketplace itself has increasingly set producer and pipeline prices under pressure from new hordes of traders, many betting on the future prices of natural gas. In theory, traders would enable better deals through the magic wand of competition. And the theory seemed sound in the first years of market pricing, when supplies were robust.

During the production-pricing bind, though, something else appears to have happened. Conditioned by an irrepressible string of price increases, futures traders — who contract for future gas deliveries at fixed prices — tend to settle at even higher fixed prices, many analysts believe. Since the market uses these fixed prices as a reference point for its day-to-day prices, overestimates by traders can turn into self-fullfilling prophesies.

''One thing that's out there that I think is a bit of a negative is: Traders love volatility,'' says Reliant Energy's Langdon, who once worked for a predecessor to disgraced energy trader Enron.

Middleman traders — also children of deregulation — now sell much of the gas, taking their cut without producing or transporting it. They were supposed to bring better deals to buyers, but not everyone's so sure they do — even setting aside outright market manipulations blamed on traders like Enron in recent years.

''I sometimes wonder if these are the prices that would really be arrived at, if the user of the gas was dealing with the producer of the gas,'' muses Foster, the former Petroleum Council chairman.

Others harbor deeper doubts. Is real competition possible, they wonder, for a product that buyers absolutely need? They're not like shoppers, after all, who can simply shift to a cheaper product on the store shelf — maybe apples instead of peaches.

''I think it is very difficult, if not impossible, to foster truly competitive markets when you're dealing with energy,'' says Tyson Slocum, a consumer advocate at Public Citizen.

At six-years-and-counting, you might think supply has to expand to meet demand before long. Yet there's little sign of it yet. The industry's supply group warns of more upward pull on prices.

Even the administration of President Bush, a former oilman, hasn't come close to opening enough federal land to drilling and stripping away enough bureaucracy from permits, the industry complains. ''Our natural gas supply problems are man-made by legislation and red tape,'' groused chairman Larry Nichols of producer Devon Energy in March.

Optimists point to projections of multiplying imports of frozen liquid gas, which is warmed back to its original state in this country. However, those predictions may also veer off target.

Terminals to liquefy and regasify don't come cheaply, and investors shy away without assurance of safe supplies well into the future. Terminals typically run into a tsunami of domestic opposition, with the huge tankers and storage tanks feared as targets for attack.

''We're much more in the public eye because of the ships, because of the concern about terrorism,'' says Frank Katulak, president of the Distrigas liquid gas operation outside Boston, which wants to build a new terminal offshore.

Even with more terminals, a global supply means a world market. The United States already competes for such gas with fuel-starved Europe and will increasingly confront demand from the hulking economy of China.

More buyers means more demand, which means higher prices. By then, these could seem like the good old days.

EDITOR'S NOTE — Jeff Donn often covers energy as the AP's Northeast regional writer, based in Boston.

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