U.S. Senate Committee on Environment & Public Works
U.S. Senate Committee on Environment & Public Works
Hearing Statements
Date:   05/08/2003
 
Richard Metz
Co-Executive Officer
UNIMARK, L.L.C.


Natural Gas is the most environmentally friendly fossil fuel. On the other hand, it is a fuel which requires special handling in order to deliver it from the supply source to the consumer. Currently, it is moved through pipelines, which limits the supply source to production areas that are accessible to pipelines.[1] This makes the United States primarily dependent upon supply sources in North America.

Although the supply of gas has been adequate to meet the needs of consumers over the past 25 years, the free market price of gas today reflects the tightening of supply/demand equation. First, the attached graph (Exhibit “A”, Gas Production in the United States) reflects the daily average volume of gas (Dry Gas) produced in the United States over the past 15 years.[2] As you can see over this period, summer curtailment of gas is now nonexistent.[3] Since 1996 annual gas production has been at more than 97% of peak capacity. No additional supply exists at this time to take on additional demand.

There have been periods when consumer demand exceeds the supplier’s ability to meet that demand. When this occurs, the price of gas begins to increase until the price gets to a level that an existing consumer ceases to consume gas. This process repeats itself until the demand level is in equilibrium with supply. The industry nomenclature for this process is “Demand Destruction.” The loss of existing demand hurts the industry affected, the suppliers, and ultimately the overall U.S. economy. The attached graph[4] (Exhibit “C”) shows that since 2000 the price of gas has had periods of dramatic increases. This is another point on the curve which demonstrates that supply/demand balance for gas is very tight.

Finally, the winter space heating requirements of the residential and commercial sectors are major consumers of gas[5] and the consumption rate is directly tied to the winter temperatures.[6] On a cold day consumption can exceed 90 BCF. At the same time the U.S. production and Canadian imports are approximately 62 BCF per day. In order to meet this additional demand, stored gas must be withdrawn to meet the shortfall. Exhibit “D” provides a historical perspective of the withdrawal and injection into storage. The storage level for the winter season of 2002-2003, although starting at a normal level, was drawn down beyond the level of the prior 4 years. The first thought is: the past winter was colder than normal. It wasn’t. Exhibit “E” shows the cumulative Heating Degree Days[7] for a normal winter and for the past winter. The past winter, although colder than most of the recent winters, was still 4% warmer than normal. Therefore, the current low storage level can’t be attributed to an abnormally cold winter.

When the winter is over and storage is depleted, the entities supplying gas to the residential and commercial customers have to refill storage (fill season) in order to meet the winter demand again next year. As things now stand (April 25, 2003), it will take an average storage injection rate of 12.7 BCF per day during the remainder of the fill season to get back to the storage level that existed last year at the beginning of winter. This compares to the average fill rate for the prior 5 years of 9.2 BCF per day. This increase in storage demand of 3.5 BCF per day has to come from somewhere. At the current time it can’t come from the supply side, so it has to come out of existing demand and is done so, as stated earlier, by the price of gas increasing to the point where an existing consumer can’t afford to burn gas and, either shuts in its facility, or switches to an alternate energy source.

If the government then mandates that electric generators have to reduce their emissions (quick fix is replacement of coal fired generators with gas fired ones) this will add additional demand to the supply/demand equation and result in higher prices.

The other side of the equation is that higher prices should lead to additional supply, either through additional drilling or increased imports. Although increased imports (LNG) is the hot buzz word for additional gas supplies it will be a long and slow process for LNG to have a meaningful impact. This results in additional supplies having to come from drilling. It is a time consuming process to find and develop additional supplies. It is even harder when the government has declared many onshore and offshore areas off limits for drilling. The producing sector will fight the good fight, but it is much harder to prevail with one hand tied behind its back.

The bottom line is additional stress on the supply of natural gas will lead to economic displacement of industry which can’t afford to pay higher prices and still be competitive. I am confident that the producing industry can meet the challenge of supplying gas to the consumers, but it will have to be at higher prices. These prices will have to be even higher if areas of this country are off limits to exploration.

Attachment A: Gas Production in the United States

Attachment B: Dry Gas Data

Attachment C: Gas Futures

Attachment D: Storage Data

Attachment E: Weekly Customer Weighted Heating Days

NOTES:

[1] For 2002 LNG imports represented 1.1% of the total U.S. consumption.

[2] Data source – EIA Natural Gas Monthly

[3] Exhibit “B” details the same information in tabular form.

[4] Exhibit “C” demonstrates the historic value of the “Gas Futures 12 Mo. Forward Average” as traded on the NYMEX.

[5] Represent over 43% of total gas consumption.

[6] The demand for gas by these two sectors varies such that the average annual consumption for 2002 was only 55% of the peak monthly usage.

[7] A Heating Degree Day is a day in when the average of the high & low temperature is less than 65°F. For example, if the high and low on a day is 50°F and 20°F the average is 35°F, resulting in a 30 Heating Degree Day, (30 = 65°F - 35°F).