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5/23/2004

Not just paying at pump

By Tony Kindelspire
The Daily Times-Call

DENVER — Prices at the gas pump have been grabbing all the headlines lately.

In a week in which the national average for a gallon of gas eclipsed the $2 mark for the first time ever, it was easy to forget about last fall, when Xcel Energy announced it was raising the price of natural gas by 73 percent for homes and even more for small businesses.

The bad news — as if consumers needed to hear more of that — is that natural gas prices aren’t likely to subside anytime soon.

“This is a terribly volatile period — an uncertainty that I’ve never seen in my experience,” said Alan Levine, a senior vice president with Morgan Stanley Private Client Futures Group and a petroleum and commodities specialist for more than 30 years. “I can’t see what makes things get better.”

Speaking at the three-day GasMart conference in Denver last week, sponsored by Natural Gas Intelligence, an industry trade magazine, Levine noted that while crude oil is controlled by circumstances outside the United States, natural gas is more of a domestic issue.

He also said that while commodity prices of oil and gas had been steadily declining over a 20-year period, “now, that seems to in the process of reversing.”

According to the Energy Information Administration, the “spot price” for natural gas was around $2 per million British Thermal Units in 1999, but doubled by 2001. After dropping back down to just below $3 the following year, it vaulted to more than $5 in 2003.

In the 1980s, the federal government deregulated the wholesale price of natural gas, and the prices are now market-driven, contributing to the volatility.

This year, the price is hovering around the $6 to $7 range.

“Tight supplies have been a major factor in the increase in natural gas prices,” said Joseph Kelliher, the commissioner of the Federal Energy Regulatory Commission, who also spoke at the conference. “More drilling is needed to increase production.”

FERC has exclusive jurisdiction over natural gas. Kelliher said one of his goals in the year since he became commissioner has been to streamline the approval process for new drilling projects.

Drilling has increased lately, he said, but it’s still below the activity seen in 2001.

“Much of the drilling activity seems to be low-risk production rather than exploration,” said Kelliher.

Last spring, Xcel told the Colorado Public Utilities Commission that it was having to raise natural gas rates because of new and proposed pipelines coming out of the Rocky Mountain region, including the Kern River pipeline, which runs from southwest Wyoming to Bakersfield, Calif.

“As much (natural gas) as Colorado can use in a day, that pipeline can ship in a day,” said Steve Roalstad, spokesman for Xcel. Such pipelines open up new markets and drive prices upward, as sellers’ options increase.

Colorado traditionally has enjoyed a slightly lower price on natural gas compared to the national average, but that differential is shrinking, Roalstad said.

Both market-based pricing — supply and demand — and weather impact natural gas prices.

“If you recall, (in 2000) California had record high temperatures and the Northwest was in the middle of a drought,” Roalstad said. “Then, one of the coldest falls in recent history falling right on the heels of that.”

Those climatological events drove natural gas prices up to around $4 the following year, he said.

Aside from drilling more wells, another solution being proposed for alleviating higher prices is, like drilling, fraught with controversy.

In April, Federal Reserve Chairman Alan Greenspan suggested that one way to control the volatility of natural gas prices was to increase the global trade in the product, which, for the United States, would mean importing more liquefied natural gas.

Last year, imported LNG accounted for only 2 percent of this country’s natural gas use. But increasing that number will not come without a fight from those concerned about safety and environmental hazards associated with LNG.

While natural gas produced in the United States, Canada or Mexico is transported by pipeline, LNG comes into the country aboard specially designed ship containers.

Cooled to minus to 260 degrees Fahrenheit, LNG is concentrated 600 times more than in its natural state, making it extremely volatile and combustible.

In 1944, an accident with LNG destroyed an entire square mile of the city of Cleveland, and this January an explosion in Skikda, Algeria, killed at least 27 people, injured 72 and caused $1 billion in property damage.

Currently there are only three LNG importing terminals in the United States, but many more are planned. In Southern California, FERC is asserting that it, not the state’s Public Utilities Commission, should have jurisdiction over an LNG terminal being proposed by Mitsubishi.

“The future of LNG has never looked brighter, but unfortunately there are some storm clouds on the horizon,” Kelliher told the convention audience Monday.

The California case is important. If FERC ultimately triumphs there, then coastal states that have LNG terminals proposed for them will have no way to block them from being built.

A consulting company’s study on LNG, commissioned by FERC and released May 13, found the existence of “possibilities for some serious incidents involving LNG carriers, particularly in light of increased awareness and concern about potential terrorist actions.”

According to the FERC Web site, the leading exporters of LNG are Indonesia, Algeria, Malaysia, Trinidad and Qatar. The “best potential” countries are Russia and Iraq.

According to the San Diego Union-Tribune, construction on an LNG terminal at Long Beach, which would receive about 70 ships a year, is expected to begin this year. Whether FERC or the state ends up with jurisdiction will ultimately be decided in the courts.

“Massachusetts officials have reacted with alarm to disclosures this week that al-Qaida operatives entered Boston harbor aboard LNG tankers before the Sept. 11 attacks,” the paper reported in a March 25 article.

Despite the leverage an increase in LNG imports would have in bringing down natural gas prices, an observer of the buying and selling of energy for more than three decades, Morgan Stanley’s Levine, sees it as a very tough sell.