Natural gas industry struggles to keep promises

03/11/2014 8:17 AM

03/11/2014 8:18 AM

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 can be at least short-term obstacles to producing it, and more pipelines have to be built to carry that gas to businesses and residences.

The bitter temperatures boosted demand for natural gas, while wells in some places literally froze, making it difficult to keep gas flowing. High demand filled pipelines, so even when there was gas available, it couldn’t get everywhere it needed to go.

Prices in New England briefly spiked to record levels. Californians were asked to reduce their power consumption because utilities were running low on gas to run power plants.

Even in Texas, nine power plants trimmed output during a cold snap Jan. 6, citing restrictions in their supply of natural gas and contributing to a conservation alert.

“We know the resource base is there, but you don’t burn the resource base. You burn production” that makes it to consumers, Bob Ineson, managing director for North American gas at IHS, said at last week’s CERAWeek energy conference in Houston.

Supply issues were something of a surprise. 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. Ineson said IHS expects North American natural gas demand to grow about 15 billion cubic feet per day over the next five years, or 20 percent of last year’s 73 billion cubic feet a day.

Anthony Yuen, a natural gas analyst at Citi, predicts even more demand, predicting 33 percent growth from next year to 2020.

Utilities, pressed by environmental mandates, are abandoning coal for natural gas-fired generators. The future of nuclear power remains clouded by financial and safety challenges, suggesting more reliance on gas-fired facilities. Chemical companies that use natural gas as a feedstock have re-opened old plants and are building new ones. Export facilities are being built, and trucks and locomotives are even beginning to switch to natural gas.

Can the natural gas industry 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, an IHS director said at the CERAWeek conference. “The key question is, will they?”

MacKnight said “producers respond to prices,” and 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.

While futures prices for delivery in the next month have recovered from that low, MacKnight said, futures prices for delivery in a year or more have hardly budged from their levels in 2012. Natural gas production rose just 1.5 percent last year, as producers moved their drilling rigs to look for pricier crude oil, where production in the U.S. climbed 15 percent to 7.4 million barrels a day.

So far this year, natural gas futures for next-month delivery averaged $4.82 per 1,000 cubic feet. That’s 20 percent higher than last year’s average, but still a nearly $1 below its average of $5.78 the past 10 years.

The average residential price, which includes the cost of moving the gas to individual homes, 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.

Citi’s Yuen predicts that with increased demand and modest production growth, prices will rise another 15 percent at least. He predicts prices to average around $5.50 by 2020, a level drillers would be more comfortable with.

Bill Maloney, executive vice president of development and production in North America for Statoil, said it’s clear to him that the industry can produce “far more natural gas” than at present. It’s more a matter, he said, of whether there is “enough demand to lead to sustained higher prices.”

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 that one Wall Street analyst called them “untradeable.”

“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.”

There’s not a lack of building.

Spectra, Statoil and Chesapeake Energy teamed with New York utility Consolidated Edison in a $1.2 billion project to expand existing pipelines to deliver more gas into New York City and New Jersey.

Bill Lawson, vice president at the Williams Cos., a big pipeline operator, said his company is spending about $6 billion just in the Northeast to move more gas and natural gas liquids.

“It’s going to take an unprecedented level of cooperation between producers, power companies and pipelines” to build the multibillion-dollar projects to provide more natural gas for power generation, Lawson said at CERAWeek.

Staff writer Jim Fuquay contributed to this report, which contains material from The Associated Press.

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