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Vol. 224 No. 8 |
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| JOHN MCCAUGHEY, CONTRIBUTING EDITOR, WASHINGTON |
Elephants stampede national energy debate. When elephants stampede, goes the wise old African saying, grass gets trampled upon. It’s not certain whom the grass is in this case, but it’s likely to be the American consumer, ratepayer or taxpayer (essentially the same thing). The elephants in this case are Federal Reserve Board Chairman Alan Greenspan and Energy Secretary Spencer Abraham. Behaving unusually, Greenspan testified twice recently before the Senate Energy and Natural Resources Committee on a suddenly dear topic. For his part, the secretary convened an urgent, much-publicized “Natural Gas Summit” on the matter.
The matter, or topic, is that the US is running out of natural gas and a crisis looms. Though it is now the “flaveur du jour” in Washington, the issue has been around for more than a year amidst the energy industry cognoscenti. What “Big Feet” Greenspan or Abraham know about the US gas industry is a mystery, but their involvement is not. Greenspan is a numbers freak, who broods over statistics every morning and believes that he has spotted an inchoate trend. The energy secretary owes his position to political ties within the administration, and he knows little about energy issues or policy. However, he does what his staffers tell him to do (for whatever that’s worth, because today’s DOE has very little to do with energy).
Okay, so what are the merits of the case that the US has become dangerously short of natural gas? The pro case is strong, at least on the surface, but so is the anti-case. Let’s look at the pro case first. Abraham argues that gas storage is 32% below 2002’s level and 22% below the previous five-year average. He worries that senior citizens on fixed incomes will have to choose between heating in the winter and groceries. Tight supplies and strong demand, he says, will boost heating bills by double digits, possibly more in a cold winter.
Greenspan expands this argument by saying that higher gas costs will cause job losses by forcing US industries (such as chemicals) to move overseas, where gas prices are cheaper. American households will see “significantly higher [natural gas] bills” this winter, Greenspan avers. Indeed, the Energy Information Administration estimates gas prices at $5.50 to $6.00/MMbtu through next winter, or nearly twice last season’s prices.
The anti-case on whether the US is running short of natural gas is just as interesting. Essentially, the argument is that there is no shortage of gas, but the problem is that domestic drillers are being denied access to governmental lands. “Vast areas of the Rocky Mountains and offshore are off limits,” complains Rep. Billy Tauzin (Republican-Louisiana), chairman of the House Energy and Commerce Committee. “We see a storm brewing on the horizon and we need to prepare for it.....The federal government restricts more and more public land to natural gas development.”
Complicating the situation is that many new electric generating plants were built as only gas-fueled. Arguably, independent developers took a bet that gas prices would remain low. They lost – although, in many cases (under environmental constraints) these power producers had no choice but to elect gas as their generation source.
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Recent converts to the natural gas “fan club” are US Federal Reserve Board Chairman Alan Greenspan (left) and DOE Secretary Spencer Abraham.
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Houston energy investment banker Matt Simmons, who is associated with the University of Houston Institute for Energy Law and Enterprise, has a refreshingly contrarian viewpoint. “In 2001, 2002, for all the shortages we talked about, nobody went without gas who had money to pay for it,” he observes. “What there was, was a real, dire shortage of cheap gas. There won’t be any more cheap gas, because any surplus (will) get consumed. Yes, we are short. But I’m not that worried. It just means you’ll pay more for natural gas.”
Simmons isn’t too worried that most new, independent, electrical power plants were built to handle only gas as a fuel source. “Wait a minute,” he points out. “We’re not using all the power everyone thought we were going to use. That’s a function of the economy. And as the power got more expensive, people learned to conserve.”
On the big picture, Simmons is incisive. “The gas picture is as confusing as you could make it. Look at the basics. Are we replacing reserves? In seven of the last 10 years, we replaced reserves. In the last three years, it was over 130% replacement. So there’s plenty in the ground. The gas drilling rig count is over 800. That’s OK.
“Then people say that wells are depleting so fast. Well, it’s not a function of the well or how fast you deplete it. It’s a function of what you want to do. And with the fraccing methods today, people are depleting them as fast as they can, because good economics say that if I can empty that well tomorrow, I’ve got the cash to go drill more wells.
“In the old days, you might take 20 years to deplete a well, because the government said that’s how you had to do it. But this is a free market. Meanwhile, because of the Enron debacle, we’ve lost the old mezzanine financing group. There are some new ones coming in. If you go to the bank, it won’t lend you money unless you have flowing gas. Which is a chicken-and-egg situation – how can you have flowing gas if you don’t have the money?”
Meanwhile, Washington’s legislators squabble over an energy bill. Or, rather, lobbyists struggle to get their snouts in the tax-break troughs and, preferably, their front trotters, too. Few expect that whatever bill emerges will have anything to do with energy in the real world. 
John McCaughey edits and publishes Energy Perspective, a Washington-based, fortnightly publication that features in-depth coverage of major energy topics. Mr. McCaughey has written and edited for Irish newspapers, an international news agency, the London-based Financial Times and the U.S.-based Energy Daily newsletter, and contributed to many other newspapers. He is a regular contributor to this column.
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