February 24, 2004
Experts Call Future of Natural Gas Prices a Guessing Game
But McCombs Panelists Agree Fuel’s Importance Will
Grow
By Jerry Mahoney
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Natural gas, the clean-burning second cousin of oil, will play an increasingly important role in U.S. energy consumption in coming years. But Americans should expect to pay more for their growing consumption, at least until the country can increase imports of liquefied natural gas.
A panel of energy experts gathered at The University of Texas at Austin’s McCombs School of Business on Feb. 20 underscored those forecasts, along with warnings that the U.S. is ill-prepared to import enough natural gas to feed its growing appetite for the versatile fuel. The university’s Center for Energy Finance Education & Research (CEFER) and ConocoPhillips Inc. sponsored the event, CEFER’s fourth annual energy outlook conference.
“We’ve had a very dramatic slowdown in North American natural gas production starting in 1996,” said panelist Vincent Kaminski, an adjunct professor at Rice University’s Jones Graduate School of Management who was a managing director and head of research for Enron Corp. from 1992 to 2002. “We’re facing the worst possible outcome: price spikes and shortages that…will result in a public outcry.”
The implications of natural gas prices are broad and serious for the U.S. economy. When homeowners absorb higher utility costs to heat their homes in the winter, they have less money to spend on goods and services. Moreover, consumers account for about two thirds of the U.S. economy. In addition, panelists warned that higher natural gas prices might force layoffs and even plant closings in industries that rely on natural gas, such as fertilizer and chemical manufacturing.
Congress broke up the vertical structure of the industry beginning in the late 1970s, when it deregulated prices. Until then, exploration companies produced and transported natural gas in the tens of thousands of miles of underground pipelines that snake across the country. Deregulation spawned a web of complex relationships between producers, pipeline companies, energy marketers and local utilities. The marketing or energy-trading part of the system, which helped stabilize prices, has been seriously weakened by the demise of Enron Corp., and federal allegations that other marketers such as Dynegy Inc. booked trades among themselves to create the appearance of robust business.
Panelist Stephen C. Beasley, president of El Paso Corp.’s Eastern Pipeline Group, said the meltdown of the energy-trading sector has made the delivery of gas less efficient, and likely has impacted prices. “Over time, we’ll see more people coming back in and playing those roles again,” Beasley said.
Kaminski and other panelists voiced a stronger warning about the outlook for natural gas supply and demand than Federal Reserve Chairman Alan Greenspan spoke of last summer. Greenspan’s testimony before the U.S. House of Representatives’ Committee on Energy and Commerce in June set the backdrop for the half-day, CEFER conference. Citing a 125 percent increase in gas futures prices between 2000 and 2009, Greenspan said that the days of cheap natural gas are unlikely to return anytime soon. But he said prices could stabilize when America is better able to satisfy its energy appetite by importing liquefied natural gas.
However, as several panelists at the 2004 Energy Finance Conference noted, that will require significant investment by energy-exporting nations in plants to convert natural gas to liquid form, as well as increased U.S. capacity to return gas to its natural state when ocean-going tankers arrive at U.S. ports.
Despite the controversy and public-policy debates that natural gas has fueled since the energy crisis and rolling blackouts in California three years ago, the panelists generally agreed that domestic production is declining and prices are trending upward. While the U.S. has trillions of cubic feet of proven reserves, much of it is off limits to drilling because it is underneath environmentally sensitive areas such as national forests.
“Strong environmental opposition is extremely well organized in the Rocky Mountain states,” said Edward Kelly, head of North American Gas & Power Consulting for Wood Mackenzie, a global energy-consulting firm.
The most significant divergence of opinions came at the conclusion of the half-day gathering, when the panelists were asked to predict how much natural gas would cost in the next several years. Market watchers base their forecasts on futures prices – contracts to take delivery of natural gas – at the Henry Hub delivery facility in southern Louisiana. Sixteen pipeline systems draw gas from the facility and transport it to markets along the East Coast to Canada, as well as the Gulf Coast and the Midwest.
The gloomiest forecast came from Andy Weissman, founder and chairman of Energy Ventures Group L.L.C., a private investment firm based in Washington, D.C. “It wouldn’t surprise me in the least to see prices of $8-$10 per million British Thermal Units (BTUs) before this year is over,” Weissman said. He based his outlook in part on the fact that most new electricity generating plants built in the past five years will burn natural gas.
Noting that it is unusual for the optimistic viewpoint at such gatherings to come from academics, CEFER Director Ehud Ronn was more sanguine about the near-term price outlook. Using mathematical models, he said recent historical data on gas prices suggests there are limits as to how high prices can climb. He forecasted a futures price of $4.57 per million BTUs over the next three years.
Britt Dearman, manager of special projects for the U.S operations of Apache Corp., represented gas producers on the panel that discussed the uncertainties of natural gas supply and demand and LNG’s future role in meeting U.S. demand. He noted that in the regulated era, the average wellhead price of gas was about 25 cents per million cubic feet, compared to $3 today.
The Natural Gas Policy Act of 1978 allowed gas prices to rise according to market demand. The irony is that while U.S. consumption of natural gas has been rising, production has been declining. The number of operating rigs peaked in 1981 at 4,500 and stands at about 1,100 today. Domestic production is about 50 billion cubic feet a day, 12 billion cubic feet shy of demand, Dearman said. Imports from Canada have helped meet the shortfall, he said.
Kaminski warned that the urgency of the shortfall is masked during mild winters and cool summers, when demand for natural gas falls off. Lower consumption and lower prices could create a sense of false security and suppress drilling, making the situation worse in the long run, he said.
Panelists agreed that gas prices likely would remain volatile, because projecting demand is complicated by weather. But despite the uncertainties of supply and demand and the price volatility, natural gas will play an increasingly important role in America.
“Twenty years from today, the consumption of natural gas will be higher than oil,” said Beasley. “That’s a huge shift.”
For information on specific programs at the McCombs School, consult our contacts page. For media information, contact the Communications Director by phone at 512-471-3314 or by email at CommunicationsDirector@mccombs.utexas.edu.
