Will We Have Enough Natural Gas?

Oct. 26, 2005— -- Natural gas prices have soared to record highs recently as traders and industry officials anticipate a winter season of cold temperatures and tight supplies. The big concern: Could the nation run out of natural gas this winter?

Natural gas futures prices dropped slightly today to $14.04 per million British thermal units after a record settlement price yesterday of $14.388 mmBtu. The dip comes a day before the Energy Department releases the latest inventory figures for natural gas. Commodities traders will be studying the number closely.

"I don't think we'll have enough going into winter," said John Kilduff, senior vice president of the energy risk management firm FIMAT USA.

During the warm spring and summer months, natural gas producers store, or "inject," as much natural gas as possible. Storage levels seemed sufficient going into the start of the injection season, but after a hot summer when power generators worked at full capacity and two hurricanes struck the heart of oil and natural gas production in the Gulf of Mexico, inventory levels dropped precipitously.

Weeks after hurricanes Katrina and Rita tore through the area, the Minerals Management Service reported today that nearly 56 percent of all gas production in the Gulf region still remains off-line. Overall, the Gulf of Mexico represents nearly 23 percent of the nation's natural gas production. To date, approximately 10 percent of the natural gas produced yearly in the region has been shut down.

Natural gas producers in other parts of the U.S. have been working to make up the difference, and it's showing. Last week, the Energy Information Administration reported a strong increase in natural gas inventories. The EIA estimated that just over 3 trillion cubic feet of natural gas was currently in storage, slightly above the five-year average.

Melissa Marion of the Natural Gas Supply Association, a trade association that represents natural gas producers, said she expected inventory to be sufficient. "We believe that we will be above the five-year average," she said.

FIMAT's Kilduff is not so sure that inventories will be sufficient. "I don't think we are going to make it and to the extent that we don't, we will be in jeopardy and will have a real challenge on our hands," he said.

Tomorrow's Energy Department report will be crucial as it will be the last one before Nov. 1, the official start of the winter heating season, when inventories will be used more to heat homes and business. If this winter is severe, Kilduff predicts there could be shortages in some regions, extended school closings and even possible interruptions for those industries that volunteer to shut off natural gas usage if it is needed elsewhere.

Independent energy consultant James Jensen remains optimistic about the situation. "Things seem to be easing a bit from what was expected," Jensen said. He does, however, have one concern: "If demand comes back strongly and supply is slow to return, then the problem could get severe."

That increase in demand could come from a colder winter. Weather remains the crucial, unknown factor.

The National Oceanic and Atmospheric Administration predicts this winter will be warmer than the 30-year average, but 6.5 percent cooler than last year. That means more cold days and more days with the heat turned on. If this winter is cold and demand for natural gas soars, inventories could drop to dangerous levels. And those inventories can't be easily replenished.

"Unfortunately, natural gas is not like heating oil or gasoline, we can't import any substantial amount from overseas," said Kilduff. "Really, we're on our own for this one."

Already, heating prices are expected to soar this winter due to reduced supplies. The federal government predicts homeowners will spend 48 percent more this winter to heat their homes with natural gas.

In the face of possibly reduced supplies, the gas producers association recommends conservation. The organization estimates that if demand is reduced by only 5 percent, that will more than adequately offset the amount of natural gas not being produced in the Gulf of Mexico.

Mark Hayes, a research fellow at Stanford's Program on Energy and Sustainable Development, said reducing the use of natural gas will also help to lower prices.

"It's going to be conservation that keeps prices in check, and beyond that we'll probably have to pay a hefty bill and hope it is not a colder-than-average winter."