Experts differ on severity of natural gas crunch

Kevin Rademacher

Monday, Oct. 11, 2004 | 10:46 a.m.

Dire predictions for power prices over the next 12 months are being dismissed by local and national experts as an overreaction to a real problem.

Natural gas industry analyst Andrew Weissman recently told a crowd attending MINExpo International in Las Vegas that cold temperatures this winter could create natural gas shortages that would ultimately drive up the price of electricity within 12 months.

Weissman, the founder of Washington-based Energy Ventures Group LLC, said that the increasing use of natural gas to power electric generating plants is preventing the nation from building up its storage levels during the summer. A cold winter this year could mean shortages next summer, he said.

Weissman theorized that such a shortage could have materialized heading into this winter if not for mild summer temperatures allowing the injection of new supply into storage levels.

"It's about as serious a problem as you can imagine," Weissman told the Las Vegas crowd, adding that electric power prices could double or triple within three to four years. In a worst-case scenario, that price surge could materialize in 12-18 months, he said.

"Natural gas has been stable only because we have been extremely lucky," Weissman said.

Kirby Lampley, director of regulatory operations for the Public Utilities Commission, said the market is certainly tighter in recent years but would not predict a shortfall next year.

"I haven't seen anything that would be that soon," he said.

Currently, the average Nevada Power Co. customer in Southern Nevada pays $117.68 a month for electricity. Of that total, $54.93 is attributable to the so-called base tariff energy rate (BTER). About 26 percent of that is BTER -- or $14.18 a month -- is directly attributable to natural gas costs Nevada Power incurs.

Nevada Power, however, only generates about 40 percent of the electricity needed to serve its customers. That means another 65.5 percent of the BTER comes from gas-fired power that comes from other producers.

In all, roughly 92 percent of the BTER, or about $50.54 a month, is attributable -- directly or indirectly -- to natural gas costs.

"It's a substantial portion driven by natural gas prices," said Roberto Denis, vice president for energy supply for Nevada Power Co. "As the prices increase, that percentage gets higher."

With that in mind, spot prices for a million British thermal units of natural gas at the benchmark Henry Hub trading location were $6.23 last week. At the same date in 1999, spot prices at the same location were $2.30.

Analysts with the American Gas Association, an advocacy group for U.S. gas distribution companies, also said there is a supply problem. But in the near-term, the association is not predicting shortfalls, said Chris McGill, the AGA's managing director of policy analysis.

"The market is tight," he said. "We are simply at 100 percent of capacity."

To this point, however, by increasing drilling in existing reserves, production has kept up with demand, but it is taking twice as many drilling rigs to keep up that level, AGA reports predicted.

McGill was not amused by Weissman's claims, calling the statements about shortages "rubbish."

"I've heard that for 10 years," McGill said.

Executives with Southwest Gas Corp. of Las Vegas also discounted the shortage claims.

"We don't see any indications that there is going to be shortages," said Roger Buehrer, a spokesman for Southwest Gas. "In that instance we are counter to what Mr. Weissman has been saying for years."

Similarly, Denis agreed that supply is struggling to keep up with demand, but he said economics will keep the gas flowing.

"We see plenty of supply, price is the only issue over the next six to eight months," Denis said, adding that as price increases older drilling rigs that had once been too expensive to run will begin operating again.

Denis' assessment appears to be holding up. Despite Weissman's claims, the U.S. Energy Information Administration's most recent report showed that heading toward the winter heating season, American natural gas reserves are about 7 percent higher than the five-year average.

"We are actually in a very strong storage position," McGill said.

But because the supply and demand ratio is so tight, the market has kept prices higher. Market prices, McGill said, have been running two to three times the historic average.

That phenomenon indicates a need for a fresh approach to U.S. energy policy, McGill and Weissman agree. Federal clean air regulations have limited the use of coal-fire power plants, pushing utilities to gas-fired plants. At the same time, however, federal rules have prevented drilling in known gas reserves in places like Alaska. That dichotomy is unsustainable, experts said.

"(Higher) prices are the market's way of telling us something," McGill said.

The American Gas Association has advocated drilling in Alaska as well as increasing the storage and transmission equipment needed import liquified natural gas from overseas.

"Those are things we need to be doing right now," he said. "Those resources are still 10 years away."

The catch is Congress, which has failed in its efforts to pass a national energy policy despite three years of debates.

"Everyone is watching this closely," said Jim Owen, a spokesman for the Edison Electric Institute, a lobbying organization for investor-owned electric companies.

The last national energy policy was created 12 years ago, since that time an estimated 85-95 percent of all new electric power plants constructed have been natural gas fired, Owen said.

Included in that number will be a 1,200-megawatt, gas-fired plant about 20 miles north of Las Vegas. The plant, known as Moapa, was started by Duke Energy during the Western energy crisis. It was abandoned in 2002 when it was about half completed. Nevada Power Co. of Las Vegas received regulatory approval to buy and finish the plant last month. State regulators, however, cautioned that there could be gas supply issues as early as 2006.

"We are very worried about it," PUC Chairman Don Soderberg said.

The problem is options. Coal plants cost about twice as much to build as a natural gas power plant and take six to eight to complete as opposed to two to three years to build a gas-fired plant. That's in addition to the environmental concerns that swirl despite new, cleaner-buring technology. Other options include nuclear power, which in addition to high construction costs carries a social stigma that is nearly impossible to overcome.

Larger amounts of liquified natural gas are being imported into the United States, but again the construction of the equipment needed to store and transport the fuel attracts outcries from the public.

"In the near-term, I don't think there is a solution," Soderberg said. "It's only going to grow as utilities add new power plants. ... The utilities are responsible for generating enough power to serve their load. They have to do that."

One solution could be conservation, but Soderberg said even the higher prices consumers are paying for electricity since rates began to soar in 2002 have not curbed demand, despite public outcry about rising costs.

"The price run ups we saw during the Western energy crisis has not produced a great deal of conservation," he said. "Voluntary conservation has not caught on yet."

Soderberg said the PUC would work actively with both Nevada Power and Southwest Gas Corp. to promote conservation efforts.

Denis also said that the increased development of renewable energy resources -- such as wind and solar power -- should ease some of the demand for natural gas-fired power plants. He said, however, that no single change in individual consumption or industry-wide approach to generation is likely to turn the tide.

"We are talking about such large quantities of energy demand, multiple initiatives need to be taken to satisfy that," Denis said.