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US Natural Gas: Burning need

As businesses drink in more natural gas, some analysts fear dependence leading nation to trouble

Run-ups in crude oil and gasoline prices almost always draw attention. But there's another story out there about high energy prices.

Just ask Martin Berson, a partner in the Houston restaurant benjy's, where higher natural gas bills have eaten into the bottom line.

He finds it difficult to pass such costs on to customers.

"It's tough to be able to just raise our prices," he said.

His predicament is not isolated.

Natural gas is used for everything from fueling restaurant ovens and heating homes to fueling electric plants and producing chemicals. And natural gas prices are above historic levels, with an increasing tendency toward short-term spikes.

Some forecasters expect prices to climb still higher next year.

"When we look ahead over the next few years, we think the market is heading into a crisis," said Michael Zenker, senior director at Cambridge Energy Research Associates, a well-known industry consultant. "The broad impact will be lost jobs in the industrial sectors and higher bills for small business and consumers for both electricity and natural gas."

This comes as the United States played the part of natural gas junkie, building a slew of power plants over the past five years that are fired with gas, which burns cleaner than other fuels.

"This problem affects the whole of the U.S. economy," a team of Merrill Lynch analysts wrote in a recent report, Natural Gas: Maximum Allowable Operating Pressure. "Today the natural gas industry faces the same conundrum that oil faced in the 1950s. The nation is hooked, domestic supply can no longer meet demand, and imports are inevitable."

The basic economic concept of supply and demand is at work, with North American supply hitting a wall. With demand forecast to grow, that's putting more pressure on an already tight supply-demand dynamic.

Price cut some demand

Some say demand has actually exceeded supply over the past few years.

The higher prices worked to reduce some demand and, in turn, resulted in lower natural gas use, especially among industrial players as plants shut down or work moved overseas where costs are cheaper.

"The lower supply meets the growing demand, but it does so by backing out some of the industrial demand," explained Bobby Shackouls, chairman, president and chief executive of Houston-based Burlington Resources, which produces oil and gas.

Weather's role

Natural gas consumption also varies from year to year, dictated in part by the economic growth and by weather, which drives heat and air conditioner use.

In today's market, an extra hot summer or unusually cold winter could cause natural gas prices to soar in a heartbeat.

"Not only are we going to have higher and more volatile prices, but we're bound to have a weather episode that causes a price spike," Zenker said.

In the late 1990s, daily spot benchmark prices at the Henry Hub for gas averaged in the low to mid-$2 range per million British thermal units, according to data from Platts' Gas Daily. Last year it was $5.47. (On wholesale markets, gas is priced in mmBtu's, a measure that reflects heat content.)

Price may average $6

The outlook is up, with Cambridge Energy predicting higher prices this year and an average of about $6 next year.

Another consultant, Energy and Environmental Analysis, is even more bullish, predicting gas will average above $7 next year.

"Many consumers of natural gas would consider this to be a new era for gas prices," said Kevin Petak, director of energy modeling and forecasting at Energy and Environmental Analysis. "Gas is in a new regime, where prices are significantly higher than they were in the '90s."

Even with relatively higher gas prices, the company wrote in a recent report that it still expects consumption in the power sector to increase and "supply trends will have difficulty keeping with increased demand."

Because drillers are working in areas considered mature, increased drilling doesn't always lead to more gas. In land or waters open to drilling, it's unlikely there are undiscovered large deposits that are easy to get out of the ground.

Predictions on supply vary for the next few years, but not by much. At best, domestic production is expected to grow slightly or stay in place. At worst, it will decline.

"Supply has been relatively stagnant and constant over the last four or five years," Petak said.

"It's getting hard to find the bigger finds. The quality of what's been developed is lower."

The United States already imports a small percentage of gas from overseas in the form of natural gas that is cooled into a liquid for transport aboard tankers and then turned back into gas upon arrival. There's a move afoot to build a series of domestic import terminals so the United States can receive more liquefied natural gas. If that happens it could cause prices to ratchet down.

Effect on the end user

In the meantime, the trends experts talk about have real effects on people and businesses.

At benjy's, the Rice Village restaurant, food is cooked primarily using gas-fired appliances. For most of 2000, monthly gas bills from CenterPoint Energy were between $800 and $1,000, Berson said. Now the bills have been running over $2,000 a month.

The restaurant has largely absorbed the higher costs, and additional gas price increases wouldn't be good news, Berson said.

It's not only small entrepreneurs feeling the pain. Dow Chemical Co. is among the big companies that have been hard hit.

Dow uses natural gas and the liquids found in natural gas to make chemicals. It also uses gas to cogenerate electricity.

The price of gas contributed to a decision last year by Dow's Union Carbide Corp. subsidiary to shut down ethylene-production units at plants in Texas City and Seadrift.

Ethylene is used to make many other chemicals, which in turn are used to make everyday items like plastic bags, packaging materials, housewares and toys.

Dow says it's been investing in countries with lower energy costs, such as Kuwait and Argentina.

"Dow is going to see our share of the forecasted 4 percent volume growth in the global chemical industry, but we will not see it here in the U.S.," spokesman Doug Brinklow said.

Not easy to pass on

The Huntsman group of companies, based in Houston, has plants in Alvin, Freeport, Conroe and Dayton. Its products are used in everything from personal care products to industrial solvents.

Peter Huntsman, president and chief executive, said a $1 increase in the price of gas costs his company about $72 million more a year in North America.

More bothersome to Huntsman are the sometimes short-lived and dramatic natural gas price swings. It's difficult to pass higher, temporary costs he faces on to customers, he said.

While Huntsman has some concerns about the country's long-term gas supply picture, he said "it's not like we're running out of gas today."

Huntsman believes other factors are at play, including gas trading that's been subjected to manipulation and New York Mercantile Exchange rules that need changing.

Huntsman wants more stringent "stops" that would halt trading when gas futures spike by a certain amount.

But a spokeswoman at the exchange said the stops already in place work well and altering them would harm the marketplace.

The bottom line, said Huntsman, is that if volatile prices persist and the country continues without a policy to encourage more production, jobs will be exported and the country will continue to lose its core manufacturing business.

A host of answers

Industry groups, consultants and analysts have offered a host of answers. Most would take some time before they would work to push prices down.

"There is no magic bullet that can change it in a matter of a year," said Burlington's Shackouls, who chairs the National Petroleum Council, an industry group that makes policy recommendations to the secretary of energy.

A sampling of what's been proposed includes increasing access to lands and waters now off limits, making it easier to get government permits for certain areas, constructing a pipeline to bring in Alaskan gas, continued or increased use of coal or other fuels to make electricity, conservation, and more LNG imports.

Should significant amounts of new supply become available, pipeline additions and more gas storage facilities would be needed.

Fixing the gas supply crunch, wrote Merrill Lynch "will take time and money and will involve some difficult, costly and sensitive decisions."

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