Natural Gas: Big Worry This Winter

New York Times
November 14, 2005
By Simon Romero

Unexpectedly warm weather has bathed much of the United States in recent weeks, but fears persist that a classic energy shock may be unfolding as the nation heads into winter.

This time, though, the coming squeeze is in natural gas rather than oil.

Executives at companies that consume large amounts of natural gas are warning - almost screaming - about the costs they expect to face over the coming months.

"Our monthly natural gas bill has doubled since August, from $700,000 to $1.4 million," said Fletcher Steele, president of Pine Hall Brick in Winston-Salem, N.C. Mr. Steele said he planned to shut half of his production in January, when natural gas prices are expected to resume climbing again because of cold weather.

While they have been rebuffed so far - Republican leaders in the House were forced to pull back on a budget bill that would have opened the Arctic National Wildlife Refuge in Alaska and coastal waters off several other states to drilling - energy suppliers are expected to keep pounding at the door. The dispute over expanding drilling is related to the fierce opposition from environmentalists, real estate investors and residents of areas where the industry would like to put operations intended to increase imports of natural gas.

In the meantime, higher prices for the fuel are rippling through the economy. And with more than half of the nation's homes heated by natural gas, millions of Americans are already bracing for big price increases this winter. The Energy Information Administration recently predicted that the cost of heating a typical home with natural gas could rise by more than 40 percent in coming months, or an average of $306 a household.

At the same time, officials are warning businesses that they face possible disruptions in the natural gas supply in some states this winter. Under long-established rules, utilities will give the highest priority to supplying natural gas to homes, possibly cutting off some companies and forcing some manufacturers to turn to other energy sources.

Beyond the fear of supply disruptions, higher natural gas prices have stoked concern of price increases cascading through the economy, with the most recent monthly inflation gauge at 1.2 percent in September, the largest increase in a quarter-century. The United States now has the highest natural gas prices of any industrial country, surpassing those in Germany, the Netherlands and China.

The prices have been pulling back from a post-hurricane spike in October that sent them above $14 per thousand cubic feet, but they remain at unusually high levels, with the futures contract for December closing at $11.61 on Monday. Only three years ago, during a glut, natural gas was selling for as little as $2 per thousand cubic feet.

High prices are inflicting pain across the country, hitting hard at utilities in the mountain states, grain elevators in the Midwest and chemical manufacturers along the Gulf Coast. Announcements of job losses in energy-intensive industries are mounting. For instance, Lyondell Chemical of Houston said last month that it was shutting a foam chemicals plant in Lake Charles, La., cutting about 280 jobs. The reason was higher energy costs, the company said, though Lyondell also cited damage from Hurricane Rita.

Other companies unable to pass all their higher natural gas costs to customers are starting to announce big losses. For example, CMS Energy, Michigan's largest natural gas utility, reported a $263 million loss this month. The hurricanes made a bad situation worse. The American Chemistry Council estimates that 100,000 jobs at companies that rely largely on natural gas have been lost since prices for the fuel began climbing in 2000. Chemical companies have been particularly outspoken in calls for the Bush administration and Congress to focus on curbing consumption and repairing energy infrastructure in the Gulf of Mexico. "We need to declare a national crisis," Andrew N. Liveris, the chief executive of the Dow Chemical Company, said in recent testimony before the Senate. Dow, the nation's largest chemical maker, has shut 23 plants in the United States in the last three years in places like Somerset, N.J.; South Charleston, W.Va.; and Elizabethtown, Ky., as it shifted production to Kuwait, Argentina, Malaysia and Germany, where natural gas is cheaper.

"Call it demand destruction," Mr. Liveris said. "Dozens of plants around the country have closed their doors and gone away, and are never coming back." The Bush administration has begun to urge conservation, in moves that draw comparisons to President Jimmy Carter's calls in the late 1970's to don a sweater and turn down the thermostat. But as officials contemplate further action, the energy industry is stepping ahead with plans of its own.

Long-contemplated projects have come back to life, including a $20 billion pipeline to bring gas from Alaska to the lower 48 states and a $3 billion pipeline to transport Rocky Mountain gas to big cities. Beyond the lobbying to overturn drilling bans off coastlines, the industry is redoubling its efforts to overcome objections to importing large amounts of natural gas from countries in the Middle East, Africa and Asia. Some of these projects might eventually materialize, but none quickly enough to bring natural gas prices down substantially before this winter. Still, the proposals are part of a major push by the energy industry to raise imports and overturn decades of environmental limits on domestic exploration.

If greater offshore drilling were allowed, "we could move up by 50 percent to 100 percent of current production, a lot in natural gas," claimed John F. Hofmeister, president of the Shell Oil Company in the United States. The current supply shortage results mainly from production disruptions in the Gulf of Mexico, where nearly 40 percent of output remains shut. But it has also revealed two disturbing trends: disappointing production elsewhere in the United States and an inadequate imports via pipeline from Canada.

Wildcatters are frenetically trying to drill as much as possible in parts of the Rocky Mountain West, but these efforts have produced severe bottlenecks as companies have flooded the Bureau of Land Management with a 30 percent increase in drilling applications over last year. The result has been a backlog of two months or more for approval of hundreds of projects. Some companies that rely on natural gas to generate electricity are, meanwhile, scrambling to find substitutes, creating greater demand for coal, fuel oil and even wind energy. Prices for coal from the Powder River basin of Wyoming have almost doubled since September, to about $19.50 a ton from $10 a ton, and railroads there are under strain to take more coal from the area.

And in Colorado, the wind-energy customers of one Denver utility, Xcel Energy, will be paying about $10 less on average per month than customers who buy electricity made from natural gas. The surge in prices is repositioning the debate over whether greater imports of natural gas are needed.

Some officials, most notably Alan Greenspan, the departing chairman of the Federal Reserve, have warned repeatedly over the last two years about the risks of a supply shock because of too much reliance on domestic production. "Our limited capacity to import liquefied natural gas effectively restricts our access to the world's abundant supplies of natural gas," Mr. Greenspan said in June 2003. "If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required." The United States currently has five terminals for importing natural gas. Regulators have approved the construction of eight more; all but one are planned in coastal areas of Louisiana and Texas that are prone to hurricanes.

Rooted in fears over accidents or terrorist-induced explosions, opposition to terminal projects in other parts of the country raises the possibility that the United States might lose access to natural gas sources to other nations where governments can easily override local objections. In China, for instance, officials in Beijing recently determined that the country would build 10 L.N.G. terminals, paving the way for China to compete for natural gas reserves in Asia and Russia.

The scramble for those resources, of course, is less immediate than fears of a prolonged cold snap in the months ahead. William Poole, president of the Federal Reserve Bank of St. Louis, said recently that natural gas prices were the biggest short-term risk to the economy. "If we have a cold winter," Mr. Poole said with the typical reserve of central bankers, "we may find ourselves with an unpleasant crunch."