Bringing on the Heat

Last winter, the United States experienced the highest natural-gas price surge in its history, an increase of some 400 percent on the wholesale level. In response, the Public Utilities Commission approved several rate-hike requests by the state's largest energy provider, Xcel Energy. One jump in January alone generated $361.6 million.

The upsurge was triggered by spiraling wholesale costs. For years, these prices had hovered around $1 to $2 per one thousand cubic feet (Mcf), and no one expected prices to ever surpass $3 per Mcf. But once that barrier was broken in spring 2000, prices took off, peaking at an extraordinary average of $10 per Mcf nationwide. (The cost in Colorado climbed to around $6 or $7 per Mcf, while electricity-starved California topped out at $60 per.)

"We went into the winter with the lowest level of natural gas in storage that the country had ever had," says Randy Udall, director of the Aspen-based Community Office of Resource Efficiency.Natural gas is stored in large underground caverns, and supplies are finite, so when record cold temperatures hit nationwide last November, natural-gas buyers went into a frenzy, seeking to secure sufficient product. Prices shot up as demand outstripped the deliverable supply.

Some blamed last year's shortage in part on the low natural gas prices in 1998 and 1999, which made it difficult for developers to profitably extract much gas. As a result of the depressed market in the late 1990s, drilling slowed, and natural gas reserves in the United States fell to an all-time low. But Ken Reif, director of the Colorado Office of Consumer Counsel, sees low storage as only one factor. With prices already rising in summer, he says, suppliers were torn between meeting the market's growing needs and stockpiling gas for the winter. A warming trend eased demands last winter. Udall, however, believes that had the frigid temperatures kept up in subsequent months, the country's natural-gas reserves could have vanished altogether, a prospect he says would have been "an unimaginable calamity."

Increased conservation also helped reduced natural-gas usage last year, and experts believe there's a better cushion in place now. Xcel has already announced lower rates heading into winter.

Regardless of short-term price fluctuations, however, experts expect natural gas to play a major long-term role in our country, particularly in powering electric generators. In Colorado, four of ten new power plants that went online between 1996 and 1999 are powered by natural gas.

"We are building the most incredible amount of gas-fired power plants to prevent the U.S. from having to worry about blackouts," says Matt Simmons, president of Simmons and Company International, an energy investment bank in Houston. That's assuming, of course, that there is an abundant supply of gas. According to John Curtis, a professor at the Colorado School of Mines, there are an estimated 1.09 quadrillion cubic feet of "technically recoverable" natural gas in the United States -- that is, gas that can be extracted now with current technology. The amount is estimated to last between fifty and seventy years. Others believe there may be twice that amount.

And the Rocky Mountains are going to be critical to maintaining that flow. While the region still trails the Gulf Coast in total natural-gas capacity, the mountain states are catching up fast. According to the Web site, a joint clearinghouse of several gas industry organizations, the Piceance and Uintah basins in northwestern Colorado and northeastern Utah are the location of two of the largest gas-supply basins in the country. Colorado alone is the sixth-largest producer of natural gas in the U.S., with the state's wells producing 750 billion cubic feet every year. Although regulations restrict or prohibit drilling on some federal lands, there are still more than 100 trillion cubic feet open for extraction.

But despite the abundant natural-gas supply in the United States, Udall says the U.S. only has enough gas in proven reserves to run the country for six or seven years. Sixty percent of the gas, he says, is coming from wells that are three years old or less. Simmons says that between August 2000 and July 2001, 19,200 new wells were drilled in the United States. In the twelve months preceding that, only 13,000 were drilled. And between 1996 and 1999, companies sank 10,200 wells. "We have the system cranked up in North America as high as we possibly can for the next five to seven years."

Unfortunately, Simmons says, despite the massive increase in new wells, production of the resource is not keeping pace. Some estimates put its growth at between 1 and 3 percent. Others claim that growth in the natural-gas supply is essentially flat, that the industry has to run faster just to stay in place.

Yet not everyone buys the gloomy scenario.

"If you look at predictions of oil and gas reserves, we keep hearing about imminent decline, but we never get there," says Ken Wonstolen, senior vice president of the Colorado Oil and Gas Association (COGA). Wonstolen agrees that production has been pretty static over the last ten years but notes that there has yet to be a really big wave of new explorations. Even so, analysts say there are reasons to be cautious about any predictions. Simmons notes that production rates of new wells off the Gulf of Mexico have declined 53 percent in one year. "Those aggressive decline rates are happening in far too many places in North America," he warns.

When the economy grows again, natural-gas power plants will certainly make sense, advocates say. Gas sites are easier to permit, less expensive to build and more environmentally friendly than coal. Most environmentalists accept gas as an effective transition fuel that will help wean the country off dirtier fossil fuels such as coal and oil. However, says David Bowden, spokesperson for the Colorado Renewable Energy Society, "the big fault of constructing natural-gas power plants is the price is highly variable. It's still a short-term solution."

But while Bowden and others stress the need for more renewable energy sources, Simmons expresses doubt about those forms of energy, claiming that last year only 1/10th of 1 percent of electricity came from solar and wind power. "Even if [solar and wind] had explosive growth, they would be incidental." He calls renewables "terrific power sources" for small towns and cities, but anything larger then half of Denver is too large to benefit. Steve Soychak, a district manager for Williams, which is drilling gas wells in western Colorado, says it would take 27 acres of solar panels to match the energy output of one well, which only uses between one and one and a half acres. Six wind turbines on ten or twenty acres would be needed to produce the same energy.

"We're staking our electrical generation on natural gas," says Greg Schnacke, executive vice president of COGA. He believes the reserve base is large enough to last for years, but governmental restrictions on access and a diminishment of the industry's employment base and equipment stock over the years will make things tough. That coupled with what he calls a "miserable rate of return" for investors could cloud the future. "The largest gas providers have only returned about 5 percent on their capital," he says. "You can get a better return on a T-Bill with no risk. That does not facilitate attracting a lot of risk capital into the industry."

Some suggest that a price around $3 per Mcf may be high enough for developers to increase their drilling operations but low enough for consumers to afford fuel bills. However, without massive restructuring of markets, Simmons says there may be no chance of stabilizing prices; the boom-and-bust cycle of the last year and a half could easily happen again.

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T.R. Witcher