Natural Gas Producers Optimistic

Article excerpt

By Thomas C. Hayes

N.Y. Times News Service

DALLAS _ For natural gas producers in the United States, the last few years have been a famine of biblical proportions. Prices have been so low that hundreds of companies have been driven out of business and thousands of workers have lost their jobs.

Now, suddenly, gas prices are at a post-1985 high. They were jolted upward most recently when Hurricane Andrew tore through the Gulf of Mexico last month, knocking out about 5 percent of the nation's gas output for several weeks.

But the hurricane was only the latest of several events that have caused spot prices for natural gas to double in only six months. What is more, gas producers now believe that the confluence of a number of longrm trends will keep prices comfortably above the lowter marks of recent years.

"We are getting back very close to a balance in supply and demand in natural gas," said Kenneth L. Lay, chairman and chief executive of the Enron Corp., operator of the nation's biggest pipeline and a large independent gas producer.

Analysts say the markets are favoring producers because of a combination of factors that have been either limiting supplies or increasing demand.

R. Gamble Baldwin, managing partner of Natural Gas Partners, an investment firm in Greenwich, Conn., said prices could spike above $2.50 per 1,000 cubic feet if the winter is particularly cold.

Gas consumption in the United States has increased in each of the last five years, partly because industrial users and utilities found gas cheaper to burn than fuel oil. By most accounts, gas use will reach 20 trillion cubic feet this year, the highest since 1979.

Some forecasts put the annual total at 23 trillion by the end of the decade, with most of the increase coming from new gasred electric power plants. Between 1978 and 1988, Congress banned gas as a fuel source for new industrial plants and new electrical power plants because of fears of shortages. Gas plants are cheaper to build and operate than coal or oilred plants and they pollute less.

While production has risen enough to permit the use of gas in power plants, drillers have not been finding enough new gas fields for reserves to keep pace with rising production.

In 1991 additions to reserves amounted to just 70 percent of production. With drilling activity at a 50-year low and with output rising, reserve replacements will certainly be even lower this year.

Existing total proven gas reserves amount to an eightar supply at current consumption rates, according to the Energy Department. But the National Petroleum Council, an industryonsored group that advises government energy officials, says probable gas reserves exceed a 50-year supply, and it maintains that if prices remain high enough to finance drilling and production, the level of reserves could quickly be increased.

Rising crude oil prices this year have helped to bolster gas prices. Many manufacturers and utilities can burn either gas or No. 6 fuel oil, whichever is cheaper. With the price of light domestic crude oil hovering near $22 a barrel, gas has had a clear price advantage over fuel oil until it soared past $2 per 1,000 cubic feet in late August.

After falling in some areas below $1 per 1,000 cubic feet _ the lowest winter price in 15 years _ last February, when the weather was unusually warm, gas prices have marched steadily upward.

"The gas situation has finally bottomed out and is turning around," said George P. Mitchell, chairman and chief executive of the Mitchell Energy and Development Corp.

The rise can be attributed in varying degrees to a cool spring, which caused demand for gas for heating to stay high; hot summer temperatures in the Southeast, where gaswered electricity typically runs the airnditioners; voluntary drilling cutbacks by some producers who were disgusted by low winter prices; new rules in Texas and Oklahoma that squeezed some output, and the June report that the nation's drilling activity had fallen to the lowest level in 50 years, with only 596 rigs exploring for oil and gas. …