Many factors fuel natural gas price hikes

Recent high natural gas prices are a wake-up call, according to Gerald Lee, senior gas manager for Springfield's City Utilities.

The challenge it makes clear is the need to find the best mix of energy resources for the United States.

This winter's astounding price leap caught the industry unaware, Lee said. He should know. It's his responsibility to bring the natural gas "to the burner tip of the customer."

For three years, utility companies have been paying a comfortable $2 or so per dekatherm for natural gas, Lee said. No one would have predicted that within a year the price would be nearly $10 per dekatherm. But that's what happened.

"This was a definite surprise," Lee said. An increase was predicted by "the experts," but not an increase of the magnitude that occurred, he said.

There are many reasons why it happened, Lee said, among them the three-year history of low natural gas prices. "There's no justification for $9.98 gas no basis whatsoever, not any more than there's any basis for $2 gas. It was great for the consumers, but not the producers."

It's not as if natural gas is scarce, Lee said. There's plenty of natural gas in the United States plenty in the ground, that is. Unlike crude oil, natural gas throughout the world is produced where it is consumed.

The United States produces 85 percent to 90 percent of the natural gas it consumes. The rest comes from Canada or Mexico, Lee said. "That's the difference in (oil and gas)."

With natural gas prices stuck at $2 for so long, it simply hasn't been profitable for gas producers to take it out of the ground, and therein lies the problem. But, paradoxically, "the answer to high gas prices is high gas prices," Lee said. With the prices unnaturally low, producers capped their wells and quit drilling.

However, at year's end "we're seeing a lot of drilling going on. There are record (drilling) rig counts," Lee said. The price of gas Feb. 12 was $5.74 per dekatherm, down from $9.98.

Lee doesn't expect natural gas to go below $5 this year because it takes about a year or more to bring the gas to market. At $3, $3.50 or even $4 per dekatherm, natural gas will return enough profit to the producers to keep the industry on an even keel, Lee said.

The pendulum had swung too far in each direction at $2 and $10, he said. The swing was caused in part by the financial market. "This is truly a supply-and-demand issue," Lee said.

When the natural gas industry was deregulated, starting in the 1980s, it became a commodity like wheat or soybeans, traded on the open market and thus subject to futures speculation.

"The financial market doesn't care if the price is low or high. They are indifferent. They want the volatility," because that's how money is made. And volatility is what the market got in December. The price went up $4 in a little more than a month.

Normally, between April and October natural gas purchasers, such as CU, inject gas into underground storage for winter usage. But this year, Lee said, less gas was stored nationally because the prices were too high.

While storage was below normal, demand grew and the price continued to go up. In October, gas was only about $4.50 per dekatherm, but in November, when concern set in because of low storage, the price was more than $6.

City Utilities traditionally buys natural gas in summer to store for winter. Pipelines can't meet all the winter gas needs, so at peak times the stored gas is withdrawn to fill the gap. CU stored more than 2 billion cubic feet of gas to complement what flows in through the pipeline.

"It has to last us from November to March. If you take too much out early in the winter, you have nothing left over for March, and we can still have winter in March," Lee said.

So dipping into the stored gas helped. But, "we can't insulate the customer (completely) from higher prices," Lee said.

By mixing the low-cost summer-purchased gas and the high-priced winter-purchased gas, there was some insulation to the customer's pocketbook. "We didn't deplete our storage," Lee said, but saved some in case February and March are cold. Meanwhile, many other communities went into winter with less than normal amounts of storage, he said.

But storing more gas doesn't solve the problem, either. Storage costs have to be considered.

Two full-time employees in Lee's office watch the market every day, keeping tabs on market fluctuations and developing rapport with suppliers so they know when to purchase and how much. When it was apparent that prices would continue to surge upward, CU locked in as many contracts with its suppliers as practical, and that helped, Lee said.

But what the experts hadn't considered was the strong growth of the economy, which created additional demand on electric utilities in the United States, he added. That was the wild card this year.

The clean-burning natural gas has been so cheap in the last few years that about 90 percent of the new power plants will use natural gas instead of coal.

Even Springfield's newest power plant, the McCartney Generation Station, will burn natural gas to generate electricity for peak times, Lee said.

The new power plant will be located east of the first Springfield interchange on 1-44 and south of Kearney, according to Dave Kristiano, manager of electric systems control for CU.

The James River and Southwest power stations can burn natural gas as well as coal, he said, depending on which is the most economical. Each power plant also has two extra gas-powered turbines for peak times.

Electric power needs spiked in the summer as always. Peak demand requires more electricity for air conditioning, and that need is filled primarily with electricity generated by natural-gas-burning turbines, Lee said.

Summer heat also plays a role. During periods of peak demand, such as in the hot summer months, the demand is filled primarily with electricity generated by natural-gas-burning turbines, Lee said.

Natural gas demand was increased even further by the coldest November and December in our history, Lee said, because many furnaces in the Midwest burn natural gas. Since natural gas in the Midwest is produced in Oklahoma, Texas and Kansas, it is the logical that the primary heat source for homes in the Midwest is natural gas.

Lee said it's time to look hard "at where we put our resources and our efforts for our future energy supply. But there are so many vested interests ... a comprehensive energy policy is a tough thing to do but something this country must soon agree on and follow."