INSIGHT: Only demand loss thwarts natgas rationing

03 May 2007 16:47  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--Some in industry worry that the US natural gas supply/demand balance is so tight that rationing would be inevitable, except that the high cost of gas continues to erode the US manufacturing base and consequently reduces demand.

 

The availability and price of natural gas in North America is a crucial, even frantic concern among the continent’s chemicals producers because they are dependent on gas as the industry’s principal feedstock.

 

Gas pricing and supply also are worrisome issues to the broad manufacturing sector beyond chemicals.

 

In recent testimony before Congress, the Industrial Energy Consumers of America (IECA) warned that “the only reason the US is not rationing natural gas today is because high natural gas prices since 2000 have significantly contributed to the shutdown of manufacturing plants throughout the country”.

 

Paul Ciceo, president of the IECA manufacturing lobby group, told a House energy panel that in addition to eliminating some 3m US manufacturing jobs, the three-fold increase in North American gas prices since 2000 has reduced the manufacturing sector’s gas consumption by 23%. 

 

That reduced industrial consumption in turn has freed up more than 1.5trn cubic feet (tcf) of natural gas for other uses, such as electric power generation.

 

IECA - whose member firms include chemical producers such as BASF, Celanese and Eastman along with building materials, paper, food processing and steel interests - is concerned that even with demand destruction, gas supplies are so tight as to force still more manufacturing capacity off line or offshore.

 

Ciceo said that as Congress moves to reduce US emissions of greenhouse gases, boost production of corn-based ethanol and make autos more fuel efficient – all of which directly or indirectly create still more demand for natural gas – the country’s ability to produce natgas remains severely constrained by congressional bans on offshore drilling.

 

However, even as demand grows and supply remains at best flat, Ciceo thinks rationing is unlikely.

 

Government and private sector energy authorities agree; rationing is not going to happen.

 

Joe Benneche, an expert on natural gas at the Department of Energy, said there is no chance that government rationing will become necessary. That’s the good news, but it is because of bad news reasons.

 

“The economic fundamentals in natural gas are generating demand destruction,” Benneche said. “The basic economics are at work; as gas prices rise, some demand will kick out,” he added.

 

“Nobody likes it, but that’s the way it works,” he said.

 

Benneche, who works on the department’s long-term energy forecasts to 2030, said there is nothing in the data the department sees to suggest that the gas demand/supply situation will get to a rationing point in the foreseeable future.

 

“There could be some unforeseen incidents,” he said, “such as the 2005 hurricanes that hit the Gulf coast.” 

 

The double hurricane hits on the US Gulf energy coast in August and September that year wiped out a major portion of US gas production for months, but the storms also temporarily knocked out a lot of chemical and other manufacturing productive capacity along the Gulf coastal region, so there was a parallel decline in gas demand.

 

Benneche noted too that as gas prices remain high, they also have the potential to stimulate more supply, especially with imports of liquefied natural gas (LNG). Still, competition for LNG in the global energy marketplace is stiff, and the US might not be able to get as much LNG imports as it might want or need.

 

The high cost of gas also may drive more electric utilities back to coal as a generating fuel, Benneche said, perhaps easing gas demand further.

 

Bill Whitsitt, president of the Domestic Petroleum Council, also discounts the prospects for natgas rationing.

 

“Price is the allocator,” Whitsitt said, “price is really what rations a commodity like natural gas.”

 

The council represents the 24 largest independent oil and gas exploration and production companies. Whitsitt said those firms account for about 40% of US natural gas output.

 

He said grudging moves by Congress to open some small additional areas of the US outer continental shelf to oil and gas development have helped. 

 

Last year Congress authorized development in a small area of the Gulf that previously was closed to drilling. Earlier this week the Bush administration issued a new five-year offshore leasing programme that includes - for the first time in a quarter-century - a sliver of outer continental shelf development area off the US east coast.

 

“These are near-term positive actions,” Whitsitt said. “These actions suggest that there is at least the possibility of more acreage becoming available off the Atlantic coast,” he added.

 

“These developments send signals to the market that the natgas future is not necessarily bleak,” Whitsitt said.  “There’s lots of gas out there.”

 

Still, Whitsitt said, citing new legislation pending in Washington that could have the effect of increasing gas demand while rolling back recent gains in gas access, “if Congress is not careful, they could impede our ability to meet the growing demand for gas in this country.”

 

Even then, however, Whitsitt does not foresee any rationing. Supply constrictions and rising prices “will simply force industry off gas or out of the country,” he said.

By: Joe Kamalick
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