Producers Foresee Natural Gas Shorage Ahead

Article excerpt

Not only is the "gas bubble" expected to burst this fall or winter, but the pendulum is very apt to swing the other way. Producers foresee a real shortage of natural gas, not the perception of gas shortages that was prevalent in the 1970s.

At this point, there probably is little anyone could do to prevent it, conventional wisdom says.

For some time, producers like Buddy Kleemeier with Kaiserancis Oil Co. in Tulsa and Bob Alexander of Alexander Energy Corp. in Oklahoma City have warned about gas shortages to come. And their arguments have nothing to do with their support for gas proration, which they add does not restrict supply.

Industry watchers from outside have predicted for the past four years the gas bubble would burst, but lately with a great deal more credibility as forecasts go. Latest market analysts added to that group are Goldman, Sachs Co. and Smith Barney.

While stock analysts and futures traders are delighted at the prospect of higher gas prices, producers do not welcome the inevitable price spike that would accompany a supply shortage.

Producers get a feeling of deja vu. Those old Washington tapes begin to play, and producers are always cast as the villains.

Part of the problem is that while gas prices have been depressed, the commodity has become a favorite bargain among consumers. Government statistics show U.S. gas consumption in May was up 8 percent from May 1991, according to Donald F. Textor with Goldman, Sachs Co. in New York. For the first five months of the year, it was up a healthy 3.7 percent from a year before.

"Importantly, the sector demand numbers show that the increased consumption did not occur in the weathernsitive residential or commercial sectors, but rather in the industrial, and to a lesser extent, electrical generation areas," Textor said in a report dated July 16.

But the clincher is that while gas prices have been so low, producers were not rushing out to drill for new reserves. Of the national rig tally, which is hovering near 660, less than half of the rigs are searching for gas, Smith Barney analysts have noted.

For January through May, government statistics show that domestic gas production was up only 0.8 percent from the same period in 1991, Textor said. He also noted that gas storage levels were down while gas imports rose.

"Therefore," he concluded, "only a small portion, perhaps 20 percent, of the incremental gas demand is being met from domestic production. This fact tends to support the view that U.S. gas production is currently running at a relatively high rate of capacity.

"We continue to believe that supply and demand trends indicate a tightening in natural gas markets, and we remain quite bullish about the medium and longerrm price outlook for the commodity."

Gas futures prices are now trading at about $2.20 per thousand cubic feet for January. Within the industry, many believe it is not unrealistic for gas to reach $3 by that time. Also notable, this winter is predicted to be normal or colder, reversing the trend over the past six or seven years of warmeranrmal temperatures.

Warmer winters and tax incentives to drill for coalseam and other unconventional gas resources over the past few years have distorted or, more accurately, masked the problem, producers say.

It will be compounded by consumers' growing dependence on the shortrm spot market and natural gas futures, they add. The spot market emerged in 1985; natural gas futures began trading in 1989.

Another difference from the situation in the late 1970s is that gas prices were still regulated then. And the problem with gas curtailments in late 1989 was more technical, caused by freeze offs at the wellhead and pipeline ruptures due to the sudden, extreme cold. …