The cost of cheap production

Published: Sunday, July 30, 2000



This year that didn't happen, and for several reasons.

Since March, natural gas prices have gradually crept up - crept up and stayed up, but not as a result of problems that have plagued the refining industry.

Natural gas is a different beast, although its real time problems, like oil, can be traced back to the 1998 oil market crash that was brought about as a result of a decision to control supplies by the Organization of Petroleum Exporting Countries or OPEC. While that tells part of the story, there's another side that hasn't been told - a side that explains why natural gas, like oil, is on the rise.

Why prices are up

While oil price crashes are a boon for thirsty industries and an American consuming public, they're a giant killer for oil and gas, which must make major adjustments each time prices go in the tank.

For starters, cheap energy forces oil companies both large and small to slash their exploration and production budgets. That, in turn, forces layoffs, which is exactly what occurred in 1998 as petroleum companies faced what amounted to the second largest bust in the past 20 years.

End result: Lots of experienced hands from roughnecks to toolpushers called it quits - for good. Bottom line: The industry's basic infrastructure has eroded even further.

Today, natural gas, of which the U.S. is a major producer, is in tight supply with production capabilities unable to meet the current demands placed on it by both consumers and industry.

In Lubbock, Energas, a division of Dallas-based Atmos Energy, has already begun to field some of the complaints as a result of ''pass through'' costs, which the company charges its customers to pay for what it pays for the gas.

Energas' current rate case before the Public Utility Commission in Austin has nothing to do with the latest increase. That's apples and oranges, not to mention the fact that the case hasn't been resolved.

Clay Cash, Energas' marketing manager said the problem, at least for the time being, involves supplies, which have been disrupted as a result of rigs that were idled during the last bust.

While the industry is ramping up again, it's more of a case of catch up than lack of reserves. There's plenty of gas. It's just all in the ground.

Bigger demand

Nick Rose, incoming chairman for the American Gas Association, a Washington, D.C.-based industry trade group, told The Avalanche-Journal last week that producers needed an incentive to begin drilling again and now have it.

''Now we're starting to see the rig count go up and some moderation in (natural gas) prices, but I can't tell you how long (gas) prices will be up,'' he said.

However, Rose said he does believe natural gas prices will remain high, at least through the winter until the industry can catch up.

Rose said it's a simple case of supply and demand and that demand has outstripped the supply.

In the meantime, companies such as Energas in Lubbock must file tariffs with the cities they serve whenever a pass-through (cost of gas) goes into effect, which is now the case.

A second problem that now confronts the industry involves supplying the nation's electric plants with fuel, which as a result of government clean air regulations, has turned to gas as its answer.

In Texas, alone, the Public Utility Commission reports that by this summer, 6,800 megawatts of new gas-fired generating capacity will come online that will require 750 million cubic feet of natural gas per day.

According Texas Railroad Commissioner Charles Matthews, to supply that amount of gas just on the electric side, 250 productive gas wells are needed to meet the demand. And, of new capacity that will be brought on line over the next seven years, 89 percent will be gas-fired.

From the latest bust to present day, the TRC reports there has been a gradual reduction in the supply and storage of natural gas, not to mention the elimination of 18,000 jobs that were wiped out during the last downturn - 50,000 positions industrywide.

The fact of the matter is, there is lot more going on here on the infrastructure side of the business that doesn't show up on your utility bills. That's a side of the story that's not being told.

(Chris Van Wagenen is business editor of The Avalanche-Journal. He can be contacted at 766-8744 or