Natural Gas Price Surge

SPOKESPERSON:

He told Kelly it was cleaner and better for the environment.

LEE HOCHBERG:

For 20 years, natural gas has been billed as the perfect energy solution: Safe, plentiful, and cheap.

SPOKESPERSON:

But the real reason Bob switched to natural gas was for those long, hot showers he loves so much. Better for the environment, better for your budget, better for you.

LEE HOCHBERG:

It's less controversial than nuclear, cleaner than coal and oil. Extracted from underground pools in Canada, Texas, and Louisiana and the Rocky Mountains, it's pumped through thousands of pipelines and used to heat half of America's households, and to run generators that utilities use to produce electricity– seemingly the ideal fuel, except suddenly its price has gone crazy.

MAN:

Well, it was just disbelief, you know, we sat there looking at trying to figure out why it was doing what it was doing.

LEE HOCHBERG:

In Washington State, the Clark Public Utility in Vancouver burns natural gas to run the turbines that produce electricity for 150,000 customers. As a public utility, its mandate is to produce cheap power, but the soaring cost of its natural gas fuel caught the utility off guard.

MICK SHUTT, Clark Public Utilities:

When we built the plant, we had the expectation that gas prices would be relatively low. When prices hit $40 when you're used to paying $2 or $3, obviously, that's a pretty severe bump in the road. It was a very helpless feeling to see the numbers just skyrocket.

LEE HOCHBERG:

Clark Utility wasn't the only one fooled by the price surge. A year ago, an energy industry report to the federal government said America had an abundant and available supply of natural gas. Now, its wholesale price has quadrupled. Utility bills have soared for the 50 million American households that heat with gas. And even those who don't heat with gas are paying more. Millions get their electricity from power plants, like the Clark Utility, that burn natural gas for fuel. Its customers saw rate hikes of more than 20% last month. Industry experts say the price surge is just economics.

SAM VAN VACTOR, Gas Industry Consultant:

We had a situation which, in the year 2000, we had high demand for the commodity, for gas, at the same time when we had an unusually low supply. The two came together, and we had an explosion of prices.

LEE HOCHBERG:

Sam Van Vactor publishes an energy newsletter. He says the problem started in 1998, when the Asian economic crisis slashed demand for American energy, and the market price for gas sank.

SAM VAN VACTOR:

With no incentives in 1998 and early 1999 to explore for or develop oil and gas fields, drilling went down, and with the decline in drilling, there was less developed.

LEE HOCHBERG:

Gas fields like these in Wyoming sat idle through much of those years. Though major energy companies produce some gas, 60% of production is from wildcatters, or small drillers, unable to drill, they say, if market prices for their gas are low. Some took apart their rigs and sold them for parts, and others just went back to ranching. But demand picked up with the booming American economy. Bigger houses went up, with more rooms and more appliances. Industry demand soared, the Internet now sapping 8% of the nation's energy. Internet providers like this one near Portland, Oregon, laced with wires and lights, consumed millions of new watts. This year's cold winter only increased gas demand. Producers say prices rose because they couldn't ramp up the supply fast enough. But many question whether the supply problem is severe enough to force such drastic price hikes. Attorneys General from Washington State, Oregon, and California are investigating charges of price gouging. Mick Shutt, of the Clark county utility, thinks it's outrageous his utility has had to pay 20 times its usual cost for fuel.

MICK SHUTT:

Clearly, it doesn't cost that much to produce gas and deliver. They're obviously making a lot of money selling a commodity for a price that's substantially higher than what's justified in the marketplace. The gas industry as a whole is profiteering in this situation, at the expense of our customers.

LEE HOCHBERG:

But the industry says it's doing nothing wrong.

SPOKESMAN:

You could call it profiteering, if you will. Some people simply look at it from the point of view of having been in the right place at the right time. I think there are individual companies that are doing very well, yes. Is it profiteering– that's a question of definition, I suppose.

LEE HOCHBERG:

Peter Dea is president of Barrett Resources, one of the Rocky Mountains' largest gas producers.

PETER DEA, Barrett Resources:

It's absolutely false that the producers have anything to do with gas price. We are definitely price-takers not price-makers. What our challenge is, is to explore, develop, and produce the natural gas, and then we sell it into the marketplace at whatever price the market will bear at that point in time.

LEE HOCHBERG:

The supply issue appears to be just a short-term problem. Accessible gas reserves underground could meet 75 years of demand. The National Petroleum Council estimates there's 300 trillion cubic feet in the Rocky Mountains alone. Extraction of gas has surged as prices have shot up — the number of active drilling rigs in the US more than doubling in the last two years. But that gas isn't in the pipeline yet. And some reserves are off- limits, due to environmental concerns about groundwater contamination and the effect of wells, roads, and power lines on animal habitat. Producers complain environmental regulations are slowing access to needed gas.

PETER DEA:

We have gotten a lot of concerns raised by the environmental community. However, they are unsubstantiated with facts.

LEE HOCHBERG:

Conservationists disagree. Even with gas flowing again, a return to previous low prices is unlikely. As prices fall back from their recent peak of $40 per million BTU's, Barrett says they'll need to settle at double the price they've been the last few years, for it to make economic sense to drill.

PETER DEA:

I think we're in a new gas price regime of, say, the $4-$5 range versus the $2-$3 range that we've seen in past years.

LEE HOCHBERG:

Prices are likely to be fueled by the need to invest in the nation's pipeline capacity. Though there are thousands of lines, bottlenecks in the system have aggravated supply problems this winter, and make it difficult to get gas to the Midwest and West Coast. Still, the power industry is bullish on gas. Almost all new power generation in the west is expected to come from 20 planned gas-fired plants in Nevada and Arizona, Oregon, and Washington. Six generators on the drawing board for Washington State could increase gas demand in that state by 150%.

SPOKESMAN:

We need additional supply in the Pacific Northwest, and this is where it's going to come from. There's no more places to build dams, we're not going to build nuclear plants, we're certainly not going to build coal plants.

LEE HOCHBERG:

But some say of this winter's price fluctuations is that it's shortsighted to rely too heavily on natural gas. Angus Duncan heads a Portland nonprofit that markets renewable energy to corporations and utilities.

ANGUS DUNCAN, Bonneville Environmental Foundation:

You don't insist that you're going to meet all of your new load from natural gas, because something's going to happen in the natural gas industry, and you're going to get an event you didn't anticipate.

LEE HOCHBERG:

Duncan says utilities could insulate the public from price spikes by investing in wind power, which, with current natural gas costs, has become price-competitive. Windmills in California already produce enough energy to light a city the size of San Francisco, and Northwest Power, experts say, together with conservation could alleviate the need for up to a dozen new gas-powered plants. But utility managers, eyeing brownouts in California, insist it's wise to stick with the steadiness of gas, even if it doesn't seem as steady as it once did.