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Published: Sunday, 6/12/2005

Electrifying natural gas rise

BY JON CHAVEZ
BLADE BUSINESS WRITER

For five years, there has been a giant sucking sound in the natural gas industry in the United States.

Prices for the fuel were low until 1999, averaging $2 to $3 for a million BTUs. Since then, the price has climbed to $7. After the increase, many Toledoans' heating bills soared, often to several hundred dollars for a particularly cold month.

What changed?

New technology paved the way for cleaner, cheaper to build, and more efficient electricity generating plants that run on natural gas. To meet the nation's hunger for power, hundreds of the mini-power plants were constructed.

Nearly 1,200 existed nationwide a year ago, the latest figures available. Twelve are operating in Ohio, and two more are under construction, including one in Fremont. Four more, three of which are in northwest Ohio, have been proposed but are on hold.

The plants, such as the 600-megawatt Troy Energy LLC unit south of Toledo in Wood County's Troy Township, have added 200,000 megawatts of electricity generation capacity nationwide, which would power 200 million homes and compares with 13,000 megawatts of capacity owned by FirstEnergy Corp., the parent firm of Toledo Edison.

But the plants, which operate just two months a year, are devouring the nation's annual natural gas supplies. Each one consumes about 1.6 billion BTUs an hour, enough to fuel 16,000 typical home furnaces.

Gobbling up a fifth of the yearly inventories, the plants are meeting electricity demand but are keeping the natural gas supply line restricted and have prompted wild price swings in the heating fuel.

Those swings have meant higher residential natural gas prices. And the situation seems unlikely to change for five to 10 years.

A spokesman for Dominion East Gas Co., a subsidiary of the company which owns the Troy Township plant, used a descriptive analogy.

"If you have a milkshake and you share it with more people, you add more straws," Neil Durbin said. "But unless you put more milkshake into the cup you're going to have less milkshake to go around. That's what we have now."

The natural gas-fueled plants consume a terrific amount of the fuel, said Paul Livernois, a spokesman for Aquila Inc., an electricity and natural gas provider in Kansas City, Mo., that has delayed plans to build a 400-megawatt gas-fired plant in Metamora.

Such electricity-producing units, sometimes dubbed peaking plants or standby plants because their costs are high, typically run about 55 days a year. Still, they can sell that power to utilities during high-demand times, such as on extremely hot days when electricity-gobbling air conditioners are in heavy use.

The changes brought about by operation of those plants is evident in what a metro Toledo customer of Columbia Gas of Ohio paid for natural gas in the past few years: 43 cents per 100 cubic feet in spring of 1999, 88 cents two years later, and 98 cents today.

Gas-fired plants have changed the energy picture over the last several years, Mr. Livernois said. "Those plants are viewed as the culprit in this business."

Natural gas consumption to make electricity has gone from 5.01 trillion cubic feet in 2000 to 5.22 trillion last year, although it peaked at 5.41 trillion in 2002, according to the U.S. Energy Information System.

The new standby power plants are evident in Ohio's consumption. Such plants used 8.78 billion cubic feet in 2000, jumped to 21.47 billion in 2002, and now stand at 12.09 billion, federal records show.

Electricity generation by these plants has dropped in Ohio - from 1.6 million megawatts in 2002 to 1.3 million megawatts last year - and it has risen nationally, to 618 million megawatts last year from 517 million in 2000.

Some experts say too many of the plants were built in some areas. Still, their natural gas consumption was unanticipated five years ago, experts said.

In part, that was because natural gas shortages had been forecast in previous decades and didn't materialize, so the industry was skeptical of prospects of shortages occurring after 2000, said Paul Wilkinson, vice president of policy analysis for the American Gas Association in Washington.

Ray Frank, a Columbia Gas spokesman, said the natural gas-fueled power plants have guzzled the surplus cushion of gas that historically was available prior to 1999.

After 2000, the surplus started to disappear and new supplies were not being developed, partly because suppliers didn't believe the impact on supplies would be that great.

In turn, the weather has affected natural gas use and has resulted in volatile wholesale prices on the spot markets.

"We haven't adjusted fully yet to the supply problem. It's going to take time," said Mr. Wilkinson, of the national trade group.

The Energy Information Administration's June natural gas price forecast is pessimistic.

Even though stores of the fuel remain above the five-year average, a growing economy, regional power demands, and limited prospects for more gas production combine to possibly push prices to $7.50 per million BTUs by the end of the year.

A report by a New York consulting firm, Pilot Energy Group, said that, if the weather this summer hits the 10-year average for temperatures, gas consumption will increase by 200 billion cubic feet.

That's most of the 270 billion cubic feet in storage today, which is above the five-year average.

"If there's a hot summer, you get a wild ride on prices later," said Joe O'Donnell, who is head of research for Aquila.

He said part of the problem for natural gas consumers is that the commodity is so closely tied now to the price of oil.

Crude oil is priced over $50 a barrel, partly because of unstable world supplies and also because of growing demand from China for oil.

"In the short term there's not a lot of breathing room to bring more supply online quickly," Mr. O'Donnell said.

In turn, that causes more people to look at alternative fuels, like natural gas, and drives the price up as speculators gamble that gas demand will increase.

"The normal cost of production of natural gas isn't $7 (per million BTUs). It's usually around $3.50. But with prices for crude so high, you have natural gas hovering halfway between the price of No. 2 and No. 6 fuel oil on the spot market," Mr. O'Donnell said.

The American Gas Association predicts consumption of gas by the electricity industry will hit 27 percent by 2010 and 33 percent by 2020.

"I believe the U.S. is going to shift to becoming a net importer of natural gas," Mr. O'Donnell said.

Only a handful of U.S. shipping terminals exist to handle liquid natural gas, but 50 facilities are planned and could be ready by 2008.

Mr. Wilkinson, of the gas trade group, said imported liquid natural gas could restore that cushion of supplies that disappeared five years ago.

"You've got to get it from somewhere," he said.

"Right now you can't drill for gas off the coasts or in much of the Rockies. A lot of it may have to be imported."

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.



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