Home heating bills to rise in 2003

Nationwide natural gas treadmill will crank up price volatility; prices to trend higher

"The Rockies are the Saudi Arabia of natural gas."
- Several media headlines

"Alaska gas is needed because traditional supplies cannot keep pace with U.S. demand."
- BP, Nov. 2002

"All I know is just what I read in the papers."
- Will Rogers

"A man's most valuable trait is a judicious sense of what not to believe."
- Euripides

Problems in today's natural gas industry should translate into higher costs for home heating energy during 2003. Higher prices probably won't strike most consumers until later in the year, and no one can safely say how high prices will go, but the price drops over the past 16 months are history.

Flashback

Recall the gas price roller coaster of 2000-2001. Your heating bills hammered your wallet. More new home shoppers asked about energy efficiency.

Starting in January 2000, $2 natural gas prices (wholesale rate, per million Btus) rose steadily to a record $10 by December. Gas distributors nearly doubled the rates they charged homeowners. Protesters made headlines. Remember California blackouts? Congress sought scapegoats.

Yet by July 2001, prices dropped to $3, then al I the way back to the normal $2 rate by year's end. After a lag, gas distributors cut prices dramatically. Xcel's rates arc about where they were before the 2000-2001 run-up.

Think of this as the calm before the storm.

The coming trend should increase awareness among homeowners and home shoppers about the volatility of energy prices and the value of energy-efficient, higher-performing homes.

Caveat emptor

Warning: "Gas price expert" is an oxymoron. a contradiction in terms. Energy price analysts make weather forecasters look good. The saying about gas price analysts goes like this: "If you can't forecast accurately, then forecast often."

Personal disclosure is in order here. Back in the summer of 2000, I wrote that natural gas prices would he rising fast in the near future an easy call. Then in March 2001, 1 speculated that gas prices would stay moderately high in the future. Ooops. In May 2001, well before Enron folded. I wrote that Enron's Ken Lay was "Laying One On Us." Bingo! In January 2002, 1 projected a slow increase in natural gas prices, yet they've doubled. I'm only batting .500, but that's dynamite compared to some industry CEOs.

Clueless CEOs

Each January a group of Denver-based CEOs of natural gas companies attend a New Year's breakfast when everyone bets what the gas price will be 365 days later. In 2000, the winner missed by over 300 percent, he bet $3.24 when in fact the gas price finished at $10. A friend of mine who finished second (S3.03) then bet the price would finish 2001 at $12. The actual price finished at $2; he missed by 500 percent.

Lesson learned? Lots of industry CEOs don't know diddly about future price movements.

Question: Can you imagine how you would feel knowing that the price of lumber and drywall could easily double in a few months? Compared to the building industry's price concerns, the commodity charge for natural gas is as volatile as a bull at the Stock Show rodeo.

"Rockies the Saudi Arabia of natural gas." (?)

Consider the above bogus headline analogy.

The Middle East is the most prolific oil and gas province in the world. You knew that. What most people don't know is how fast the Saudis' oil flows.

Stick a straw in the ground outside Riyadh and oil flows out at a rate 450 times faster than oil extracted from the average well in the United States. That's about the difference between framing a simple two-story during a 15-minute break rather than it taking all week.

Do the Rockies have a lot of natural gas? Sure. Somewhere between 10 percent and 15 percent of the United States' natural gas resource is located here.

Trouble is, extracting it is extremely time, labor and material intensive, sometimes with environmental side effects. And even though the gas industry brings smarter people and better tools than ever to its task, they're extracting less and less gas per well (see chart above).

That's a function of two things. First, we discovered and tapped the biggest and most accessible pools of gas years ago, using more primitive exploration tools. Second, the industry is increasingly drilling in "tight sands" and coal deposits for its gas. So they have to drill more often, deeper and closer together. That takes more time and money.
Would a framer's job be easier if he couldn't use any power tools? This analogy fits.

Follow the fundamentals

Three keys point to higher heating prices later this year.

Less drilling. Since the United Slates is producing less and less gas per well over time, we need to drill more wells just to keep production flat. But drilling is clown more than 30 percent from its all-time peak 18 months ago. With less drilling nationwide, natural gas production is presently declining.

And Canada, from whom we import 15 percent of our gas. suffers the same problems with declining production per well.

Shrinking storage. Gas wells produce more than we need during the spring through fall seasons but can't deliver at one time all the gas we consume during peak winter demand periods. So companies store underground some of the excess gas produced during the "off season" and pump it into the pipeline system during cold weather.

We entered this heating season with record storage. Yet gas prices stayed high, bouncing between $3 and $4.50. A cold snap during early December drew down extra gas from storage, pushing prices to a new high for the year. The storage overhang is gone. Watch the weather.

New pipelines. Right now, Wyoming produces more gas than there are pipelines to carry it away to markets. So while prices elsewhere moved steadily up this year, Wyoming's prices hit rock bottom last summer. But new pipelines being built from the Rockies to California will come on line this year. That will "normalize" (increase) Colorado gas prices.

So. with per-well production declining, drilling still in a slowdown, the storage overhang disappearing and new pipelines equalizing prices, the trends are in place for a price increase. The amount and tinning of those increases depending on "demand wild cards."

Demand wild cards

Weather is everything. Mild weather from January 2001 through this September chopped 2002 gas prices more than any other single factor. Right now, cold weather is driving up prices. If weather this winter gets warmer than normal, demand and prices will moderate.

If the price of oil drops. dual-fuel users that can switch from higher-priced gas to lower-priced fuel oil will do so, lowering demand for gas. Conversely, if war breaks out in the Middle East, higher oil prices could push up gas prices.

If the economy slips into recession again, it would drive down the price of natural gas. (Note: high energy prices have been a factor in every recession since 1973.)

Nearly all new power plants are gas-fired generators. According to Houston-based Simmons & Co., close to one-third of all natural gas is now consumed by power plants. New plants ordered during the late 1990s will come on line this year, further spiking demand for gas. But a large number of plants ordered for 2004 have been canceled.

Supply wild cards

Decreased demand is the true wild card. Don't bet much on new sources of supply to case prices.

Gas from the North Slope of Alaska won't arrive here until after 2010.

Canada's natural gas industry is wheezing. just like ours. We already import half their production.

Gas imported by tanker (liquefied natural gas) could double over the next three years, but since it supplies just 1 percent of present consumption, that's only a ripple.

The deepwater Gulf of Mexico - drilling in up to 10.000 feet of water - is primarily a giant oil bonanza, not a natural gas play.

Between 1999 and 2001, the gas industry doubled the number of gas wells drilled but only increased production by 3 percent. If drillers are convinced by today's prices, they will ramp up drilling, but that should help even less than it did last time around Clue to the Enron factor (investment capital is much harder to come by).

Out on a limb?

Put me down for wholesale gas prices staying primarily in the $3 to $4.50 range over the next few years - close to double the historic wholesale price (excluding 2000-2001) since the late 1980s. That means prices to homeowners could be up 30 to 50 percent - enough to draw attention to the issue.

This is just another reason to build to EPA Energy Star. E-Star Colorado and Built Green Colorado standards. If I'm wrong with this short-term projection, keep this article and flail me with these figures next year. But think long term anyway. That's where my kids and yours will be spending most of their lives.

Steve Andrews consults with builders for E-Star Colorado and writes on energy issues (sbandrews@att.net). E-Star (www.e-star.com), is a nonprofit home energy rating system that works with both new and existing homes statewide.

2008 Built Green Colorado

Home Builders Association of Metro Denver, 9033 E. Easter Place, Suite 200, Centennial, CO 80112
(303) 778-1400 fax: (303) 733-9440  info@builtgreen.org

Last Updated: 10/05/2007