Mix of factors could further cut natural gas costs

Prices could match 1992 record in big plus for local consumers

2/5/2012
BY JON CHAVEZ
BLADE BUSINESS WRITER
The Columbia Gas Maumee Gate pipeline intersection network site is in Maumee. A variety of influences are driving down gas prices.
The Columbia Gas Maumee Gate pipeline intersection network site is in Maumee. A variety of influences are driving down gas prices.

Go ahead and crank up the thermostat if you like. You can easily afford it.

A combination of favorable factors has pushed natural gas bills to their lowest prices in a decade with a strong likelihood that prices will drop further over the next two months, possibly matching a record low price point set in the early 1990s.

"We're now at record gas production, there's a challenging economic environment, we have record storage, and a mild winter. At some point, you stand back and say, 'What else can go right? What else is there?' " said Mark Frye, president of Palmer Energy in Toledo and chief consultant for the Northwest Ohio Aggregation Coalition.

"The only thing that could go better for us is a mild summer. That's about the only thing that's left," Mr. Frye added.

Wednesday, the price of a million cubic feet (mcf) of natural gas dropped to $2.38 on the New York Mercantile Exchange.

The last time natural gas prices were that low at the first week of February was 2002, when the Nymex price was $2.28, and analysts consider that an aberration because the economy was in a freeze following the 9/11 terror attacks five months earlier.

The all-time Nymex low price for any month was $1.05 in early February, 1992.

Mike Anderson, director of supply planning for Columbia Gas of Ohio, said what makes the current low price for gas different from 1999 or 2002 is that at those points, the nation's supply of natural gas was dwindling.

"It's increasing today," he said.

Natural gas supplies aren't merely increasing. By most standards they are practically bursting at the seams.

The federal Energy Information Administration's latest report on the U.S. natural gas supply, released Thursday, showed there was 2.96 billion cubic feet of gas in the nation's underground storage sites, up 24.6 percent from a year ago, and up 25.4 percent over the five-year average of 2.36 billion for this time of year.

U.S. natural gas consumption for November, the latest figures available, was at 2.02 billion cubic feet.

That is higher consumption than in any November in the last 10 years.


Rising supplies

But even with increased consumption, supplies of natural gas are rising. That is because production is higher than ever.

Between 1973 and 2010, monthly gas production never reached 2 billion. In 2011, monthly natural gas production exceeded 2 billion cubic feet seven times.

What's behind the decade-low prices is a technological revolution known as hydraulic fracturing, or simply "fracking."

"On the supply side, it's the successful unlocking of the shale gas through … fracking. That has caused these very large inventories to fill storage," said Scott Richter, an energy analyst and portfolio manager for the Westfield Insurance Group in Medina, Ohio.

"The economic meltdown didn't help. What gas we would have used for industry or housing, has gone into storage. And now we've carried this large inventory on our backs because of the slow economy production and the lack of housing starts," Mr. Richter said.

Fracking has allowed drillers to unlock huge volumes of natural gas contained in the Marcellus shale region -- mostly in western Pennsylvania and eastern Ohio -- over the last five years.

Nearly 25 percent of the nation's natural gas supplies come from Marcellus shale.

According to a recent report from investment firm Sanford Bernstein, the Marcellus region is so plentiful, by itself it could supply the United States with natural gas at $5 an mcf for 18 years. But the Marcellus region isn't solely responsible for the plentiful supply.

Fracking and horizontal drilling techniques are being used in areas of Texas and North Dakota to recover oil from older and previously tapped-out wells, Mr. Richter said.

"The negative effect is when you find this oil, you also get gas. When oil is $100 for a barrel of crude and gas is $2 an mcf, they'll give the gas away," he said. "If they can flare [burn] it, they'll flare it. But the bottom line is, they have no use for it.

"And if you can't use it, it just keeps building up," Mr. Richter added.


Happy consumers

With a dropping price, natural gas producers are hurting. But consumers are huge winners.

In January, 2006, for example, Columbia Gas estimated the average heating bill for its customers at $280. Last month the average bill was projected at $112.

Rossford resident and Columbia Gas customer Jack Roesler is among those who have profited immensely from the drop in gas prices.

In January, 2006, his gas bill was $212. So he added new windows, insulation, and a new furnace.

He cut his January, 2007, bill to $94.

"With the drop in gas prices I'm not saving so much money anymore," Mr. Roesler said with a laugh. Last month, he wrote a check for $48 to Columbia Gas.

His December bill was just $47.

Columbia Gas' January price was 50 cents per 100 cubic feet, but it dropped to 45 cents for February.

Customers like Mr. Roesler could see their bills go even lower in March because there are no real impediments to keep prices from dropping.

"The lowest prices of all time was right around now in 1992 when the price hit $1.05 on the futures market," Mr. Frye said. "How far can things fall? It's possible to get to that level, but how likely is that? I don't know."

But Mr. Anderson of Columbia Gas said the factors that have created the glut of natural gas make it likely the price will keep falling. And normal relief measures that counter a surplus, such as economic activity or cold weather, are missing.

The economy remains sluggish and the weather this winter is among the mildest in years.

Columbia Gas estimates this winter is 19 percent warmer than normal and 28 percent warmer than last year.

Demand for the utility's gas is 8 percent less than normal and 21 percent below last year.

Diana King of Columbia Gas closes a valve at the Maumee Gate natural gas pipeline intersection network site. Columbia Gas official Mike Anderson said that the last time prices were this low, supplies were dwindling. But that's not the case this time, he said.
Diana King of Columbia Gas closes a valve at the Maumee Gate natural gas pipeline intersection network site. Columbia Gas official Mike Anderson said that the last time prices were this low, supplies were dwindling. But that's not the case this time, he said.

Marketplace balance

Ultimately, the marketplace has to balance itself out, Mr. Anderson said. But that means producers cutting back on monthly production and letting customers pull gas out of storage.

However, that is not happening.

As of Jan. 20, the number of rigs producing gas and oil rose by 18 over the previous week, according to a report by oil field services company Baker Hughes.

Mr. Anderson said for some producers, choking back wells just isn't an option.

"If I think I need a 15 percent rate of return by my gas well, I will probably keep producing," he said.

"It's more economical for me to try to produce it today -- even though it's selling for a very low price -- than shut down and restart sometime later. The bigger guys can reduce their production, but the smaller guys, it's a lot tougher for them to shut down."

And if the Nymex price drops to $2 an mcf at the start of March, Columbia Gas customers will see a price of below 40 cents per hundred cubic feet, Mr. Anderson added.

How long will it last?

For years, politicians and others routinely made note of the fact that natural gas prices in Michigan were lower than those in northwest Ohio mainly because of Michigan's large capacity of underground storage and its connections to a natural gas hub in Chicago, which could import lower-cost gas from the Southwest and Canada. Ohio, meanwhile, was forced to use higher-priced gas from the Gulf region via Columbia Gas' eastern U.S. pipeline network.

But with the development of the Marcellus region, that price disparity has reversed the last two years -- even though the amount of natural gas shipped to northwest Ohio from the Marcellus region is next to none.

Mr. Anderson said that what the Marcellus shale gas has done is drive prices down at the Appalachian hub where Columbia Gas purchases its supplies.

"The Chicago hub was always cheaper, but now it's a higher-price market than the Appalachia market," Mr. Anderson said.

Biggest question

The biggest question now for analysts, producers, and consumers is how long the natural gas surplus -- and the low prices it has created -- will last.

In 1999, there was a large gas surplus, which prompted electricity producers to go on a huge building spree of natural gas-fired plants that sucked down huge volumes of gas and quickly turned a surplus into a shortage.

Already, the current glut of gas is tempting electricity producers to look greedily at natural gas once more.

In Sandusky County, for example, an on-again, off-again gas-fired power plant project that was conceived in 2001 and was halted in 2005 was sold last year to American Municipal Power Inc. of Columbus, which renamed it the Fremont Energy Center and put it into full service, operating Monday through Friday from 7 a.m. to 11 p.m.

On Wednesday, American Electric Power of Columbus said it had begun commercial operation of 580-megawatt gas-fired plant in Dresden, Ohio.

It bought the partially finished plant in 2007 from a subsidiary of Dominion Energy.

Mr. Frye said such developments, and the quick change in natural gas from a dearth to a glut in just five years, show that it's impossible to know how long low prices will last.

"If you went back and looked at 2008, the price was around $8 an mcf and you had an escalating price winter-over-winter. Many were saying we're going to have tight gas supplies forever," Mr. Frye said.

"Many of those prognosticators are the same ones saying now, 'Happy days are here again, the sky is blue, and we're never going to have rain again.' "

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