Will the real natural gas story please stand up
The recent severe natural gas shortage in Massachusetts may be a blessing in disguise if it alerts the nation to the extreme instability in national gas supplies.
For the last decade, consumption has outstripped new discoveries; and gas consumers are now dangerously exposed to shortages. Such was not always the case. Gas customers once enjoyed unusual security of supply because gas companies weren't allowed to add new customers unless they had enough "attached reserves" to provide 10 years' service. Since the mid-1960s, however, federal regulators have allowed gas producers to deplete their existing gas fields more rapidly to disguise a growing gas shortage. This "front-end loading of reserves" made gas seem more plentiful and deferred the crunch, which finally struck in the first shortages of 1970-71.
Today this whittling away of the consumers' safety margin is reflected in "deliverability," which measures the ability of existing fields to continue producing even if gas discoveries lag. In 1963, the deliverability index of interstate pipelines was over 10 years. By 1979 this figure had dropped to zero.
Why have gas companies been attaching new customers in the face of steadily declining gas reserves?
First, the companies face a high percentage of costs associated with their pipeline distribution network; and these "fixed costs" must be spread over the gas volumes sold. The fewer the customers, the higher the fixed costs each customer must bear, and the lower the gas volumes sold, the higher percentage of fixed costs charged to each unit of gas. Paradoxically, as more consumers conserve, the price of a unit of gas rises. Customers respond by using even less, pushing the price up further -- a vicious circle that the industry has been trying to break out of with its aggressive advertising campaign.
Second, when natural gas is decontrolled in 1985, prices will likely surpass home heating oil prices; and companies want as many people as possible to switch to gas before 1985 when the incentive disappears.
Third, there is the "hostage" motive. The gas companies have made new residential customers their primary target because, unlike industrial and commercial users, they are "noninterruptible." Thus, in the event of a national gas shortage, utilities with a higher percentage of residential customers are more likely to get a larger allocation of gas from federal regulators. The danger, of course, is that there may not be enough gas even for homes.
The American Gas Association insists, however, there ism plenty of gas. The problem with these alleged reserves is that most are extremely costly to extract. For example, geopressurized methane -- natural gas dissolved in brackish water -- involves the expensive handling of some 400 barrels of water for every barrel of equivalent energy.
Similarly, new gas finds in the Rocky Mountains Overthrust Belt are encouraging, but most of these new reserves require expensive deep drilling. There is also Alaskan gas; but the $21 billion pipeline to transport it won't be completed at least until 1987. These "huge reserves" thus raise false hopes for a quick supply fix; most are too costly and all entail long lead times.
But is it the government's business whether the gas companies add customers? The recent crunch in Massachusetts tells us "yes" because new customers made the crisis worse for everyone. For example, in the last two years Boston Gas, the largest company in Massachusetts, added 26,000 new residential customers and over 200 industrial and commercial users. Without those new customers, it is highly unlikely that Gov. Edward King would have had to order schools and factories closed. Indeed, there may have been no shortage at all.
A second reason is that these new customers may be hurt by converting to gas heat since such an investment has a payback of two to five years at current oil and gas prices. But if the Reagan administration successfully decontrols gas immediately, converters will never realize that payback.
It is to be hoped the recent gas emergency in Massachusetts will lead federal and state regulatory authorities to increase protection of gas customers. To better anticipate shortages, state authorities should enforce stricter reporting requirements on gas companies. The federal government should assess future gas supply reliability and investigate past practices such as the front-end loading of reserves which have eroded the consumers' safety margin.
Last, states, and if necessary the federal government, should immediately ban further conversions to natural gas and prohibit new gas hookups until the "cheap and plentiful gas reserves" we have been promised make their appearance.
In the absence of such a ban, consumers should resist the snappy jingles of the gas industry's media campaign encouraging conversions to the "sure energy" and instead consider other alternatives to lower their heating bills, including investments in conservation and even conversion to coal-wood stoves.