gas prices

Following excerpts from a US article on recent O and G conference in New Orleans:

Fuel for worry

Uncertainty about energy prices abounds at LSU conference; your light bill won't be coming down.
By Tom Guarisco
Business Report staff

Anyone looking for a crystal ball forecast of natural gas prices got a mixed bag at an LSU energy conference earlier this week, but the main theme was that prices will remain relatively high and volatile.

Federal Reserve energy economist Steven Brown said he expects prices to remain in the $4.50 to $5 range for the near term. However, whatever specifics wind up in a federal energy policy will go a long way in determining prices, as will industry's response to the high prices, Brown said.

"We have the highest cost natural gas in the world right now," Brown said.

Brown was one of a handful of speakers at the conference Monday hosted by LSU's Center for Energy Studies. The program included forecasts on prices, and examined the impact on industry as well as potential ways to better meet demand for fuel.

The long-range impact of natural gas prices is something that has not been studied yet. Earlier studies assumed oil and natural gas prices would shadow each other, which is no longer the case.

"Natural gas is likely to remain high relative to oil," Brown said.

Climatologists have predicted this winter will be close to normal. Good news for natural gas prices, right? Not so fast, warned Donald L. Mason, an Ohio utilities commissioner and a member of the Interstate Oil and Gas Compact Commission. The past several winters actually have been warmer than usual.

That means this winter should be colder by comparison, and thus more heat used in homes and workplaces, which threatens to cut into supplies of stored natural gas.

Last winter reserves got down to historic lows, which helped send gas prices through the roof.

Mason said he expects gas prices to average $5.40 this winter.

Economists, analysts and petrochemical executives on Monday described a natural gas market in which there's too much demand, not enough supply, and no confidence for the short term that prices will stabilize.

"There's greater price volatility ahead," said William Hederman, director of market oversight and investigations for the Federal Energy Regulatory Commission.

His job is to help foresee and prevent the kind of market chaos that sent California light bills through the roof in 2000.

The amount of natural gas in storage will remain a critical factor determining whether natural gas prices spike this winter.

Last winter storage hit record highs, then sunk to record lows, all within one season, Hederman said. As a result, prices remained volatile amid fears of regional shortages, which didn’t happen. "We dodged that bullet," Hederman said.

Regulators had hoped reserves would be beefed up going into this winter, but they are merely at last year's levels. That opens the door for another winter of volatile prices.

"We're in for another roller-coaster ride, probably," Hederman said.

His agency investigated last winter's spikes to ensure there was no market manipulation or fraud to capitalize on the spikes, but the inquiry uncovered none, Hederman said. "The results were very encouraging."

Since that time, equity markets have grown by $60 billion, and $30 billion in energy-related corporate debt has virtually all been refinanced.

"I think the market is fundamentally sound," Hederman said. "There is a tightness in the market that needs to be managed, and companies and buyers need to do risk management."

Other important points made at the conference:

- Deep-water Gulf of Mexico reserves may eventually take a backseat to discoveries closer to the coast on the shelf in 200 feet of water, says Bill Walker of New Orleans energy investment banking firm Howard, Weil Labouisse Friedrichs Inc. The reserves are still more than 17,000 feet below the seabed and will remain a challenge to extract, but eventually they could yield lucrative production.

LSU economist Jim Richardson points out that those reserves would reap richer benefits for the state because they are subject to paying higher state royalties than deeper finds in federal or international waters.

High oil and gas prices will continue to stifle world economic recovery, but will also work to erode demand for fuel. "Something," said Howard, Weil's Bill Walker, "has to give."

He also pointed out that during the 1973 oil embargo, oil was $6.85 per barrel. Today, in 1973 dollars it is $13.23, and U.S. imports of oil leapt since then from a third to 47 percent. "Do you sense we might be just a little vulnerable?"

Louisiana's coastal shelf is now dominated by independents, not the majors, said Conoco Phillips director of operations Johnny Bradberry.

Although deep-water reserves remain largely untapped, getting at them is expensive and difficult, and there are only about 20 to 30 rigs in the entire gulf available right now that can handle ultra-deep drilling, Bradberry said.

In the next five years America will see about 4,300 new wells, and most will be the work of independents, Bradberry said.

Majors now are investing huge sums developing fields in Russia and the Middle East.