Natural gas industry in limbo
''It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness. . . .'' According to J. David Hughes, a commissioner with the Federal Energy Regulatory Commission (FERC), this bit of Dickensian prose describes the current , chaotic conditions in the US natural gas industry.
Energy planner James T. Jensen of Jensen Associates has his own analogy:
In the 1940s, aeronautical engineers broke the sound barrier, he begins. They discovered that airplane controls, which worked fine when flying below the speed of sound, didn't work well at faster speeds. They also discovered that trying to fly an aircraft exactly at the speed of sound didn't work very well: The aircraft had a tendency to break apart.
''Well, the natural gas industry is flying at the speed of sound,'' Mr. Jensen exclaims, explaining that it is caught in a transition zone between a regulated environment and a deregulated one, analogous to the zone between subsonic and supersonic flight.
''The natural gas industry is not spinning out of control, or about to break up, but when prices go up by 25 percent during a period of glut, it is clear the industry is flying erratically,'' he gibes.
Falling oil prices are exacerbating the serious problems in the natural gas industry, and the situation is getting increasing attention in Congress. The administration has proposed a bill to deregulate natural gas, while other congressmen have sponsored measures to tighten regulations and to force a rollback of natural gas prices.
The natural gas industry's current problems had their origin almost at the industry's inception. Federal regulations kept natural gas prices below market value. As a result, demand for this bargain fuel grew at about 6 percent annually for more than 40 years.
It was not until the 1960s that natural gas reserves began to run low. Because prices were controlled, there was little incentive for companies to develop new gas fields.
This led to a period of shortage and curtailment, which reached a peak in the winter of 1976.
''The system seemed to break down,'' Mr. Jensen recalls. This spurred Congress into action and it passed the Natural Gas Policy Act (NGPA), which set up a byzantine pricing structure with several dozen price classifications designed to stimulate the development of new natural gas reserves.
Ironically, the industry's diagnosis of its problems at that time were wrong, Jensen says. The nation's appetite for natural gas wasn't as big as everyone thought. The new act allowed deregulated gas, which before could only be sold within a state, to flow into interstate pipelines.
As a result, the natural gas ''bubble'' - an excess supply of natural gas - was born. Behind this lay not expanded natural gas reserves, but an excess of natural gas production capability.
The nation's attention at this time, however, was diverted by the Iranian revolution and the second world oil shock.
''We predicted that, because of the oil shortage, a large number of people would switch to natural gas. But this didn't happen,'' Jensen explains. Although no one realized it at the time, energy conservation ''was swiping the market from both oil and natural gas,'' he says.
But still laboring under the assumption that gas shortages were imminent, and unable to compete by price because of federal regulations, contracts became ''a sort of black market'' in which distributors secured guaranteed supplies of high priced gas, says Jensen. Many signed so-called ''take or pay'' contracts where they agreed to pay for a large percentage of the gas even if they didn't take it.
But since 1973 the gas consumption of the average American household has dropped steadily, reports Richard Itteilag, director of gas demand analysis for the American Gas Association. In addition, industrial gas use has also been dropping: It was down 14 percent in 1982 alone, largely because of switching to lower-cost oil.
''The supply issue is not the question of the day. The timely issue is demand ,'' Mr. Itteilag comments.
Because of falling demand, the gas companies now are stuck with contracts for more gas than they can get rid of.
''Because of the mild winter, companies' storage is almost full, and they don't have anywhere to store the gas they have contracted for. As a result, a lot of people are on the edge of panic,'' says A.N. Porter, president of the Northwest Pipeline Corporation.
''We're rapidly entering an environment where the gas companies will be forced to say, 'I can't take the gas. I can't pay for it. So sue me,' '' Jensen says.
These problems are generating considerable political interest. Over 50 pieces of natural gas legislation have been introduced recently. Although the NGPA sets a gradual schedule for deregulating 50 percent of the nation's natural gas supplies, the administration has proposed a quicker and more comprehensive decontrol measure.
Energy Secretary Donald Hodel testified that this measure would eventually bring a decrease in the average price of natural gas. But a General Accounting Office analysis estimates that natural gas prices will surge by 18 to 100 percent.
Even if gas prices remained stable, the monthly bills of some 45 million households dependent on old gas fields would go up, adds FERC's Hughes, since this ''old gas'' is currently held at the lowest price levels.
Congress is already worried about public response to recent increases in natural gas prices. The Senate overwhelming passed a resolution asking FERC to do what it can to keep natural gas prices from rising any further. A House proposal to roll back natural gas prices has been introduced, with 100 cosponsors.
The gas industry itself is fragmented on the pricing issue. Gas producers disagree on what form decontrol should take. The pipeline operators have an entirely different view. And gas distributers are totally against the idea.
''Buying decontrol is buying a package with a number of other things which a lot of people won't like. In fact, the (administration) bill was crafted to take a big chunk out of a large number of interests,'' comments Lawrence Kumins of the Congressional Research Service.
A proposal being floated on Capitol Hill would tie a windfall profits tax on natural gas to deregulation. The administration has signaled it is willing to consider such a measure.
Industry analysts point out that unless something is done, the US may be setting itself up for another natural gas shortage sometime in the future.
Without Alaska, the US currently has only eight years of reserves even with all the new gas finds of the last few years. And work on the Alaska Natural Gas Transportation System, a $45 billion project which would pipe Alaskan gas to the lower '48, appears to have fallen victim to declining energy prices.