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Natural Gas Prices Expected to Hit Record High This Winter

Posted on: Thursday, 8 September 2005, 18:00 CDT

Sep. 8--PADUCAH, Ky. -- Natural gas prices could be the highest in history this winter, the Kentucky Public Service Commission says.

"A combination of factors is pushing prices to unprecedented levels," PSC Chairman Mark David Goss said. "Natural gas is likely to cost more than it did during the winter of 2000-2001, when prices set a record."

Before Hurricane Katrina hit, the U.S. Department of Energy had predicted that wholesale prices for natural gas would jump by at least 20 percent this winter. About 44 percent of Kentucky households heat with natural gas.

The news also is distressing in rural areas where propane and heating oil are more prevalent. The big culprit is the cost of crude oil, which soared to $70 per barrel just after Katrina hit. Propane and heating oil costs rose by 34 percent last winter and may increase another 16 percent this winter, based on the U.S. Energy Information Administration's Short Term Energy Outlook released in August. Propane is a byproduct of natural gas producing and petroleum refining.

The good news is that with abundant coal-fired power plants, Kentucky continues to have the lowest electricity costs among the 50 states.

Because of severe supply-demand imbalances, the wholesale price of natural gas more than doubled in the two years leading up to September of 2000. The price then jumped from $4 per thousand cubic feet to more than $10 in some areas by that December. It gradually declined as the heating season concluded.

As more gas was produced, average monthly bills in Kentucky dropped about $10 through 2003. But demand for natural gas throughout North America continues to increase, and new production has been unable to keep pace. The ability to import gas from overseas is limited, the PSC says

Rising demand has led to increases of more than $30 per month for average customers in Kentucky since 2003. Prices rose this summer, rather than dropping as they usually do during warmer weather. About 44 percent of the Kentucky residents heat with natural gas.

"Last year, the spot market price of wholesale gas was about $5.25 to $5.50 (per 1000 cubic feet)," said PSC spokesman Andrew Melnykovych. "Now it's $11.50 to $12.50."

It will be at least another month before gas companies report their rates to the commission, but the outlook isn't good, said Tom Higdon, spokesman for Atmos Energy's Owensboro-based Kentucky operations.

In Kentucky, 65 percent of the gas used in winter is stored in late summer to early fall, Higdon said. Seventy percent of the storage has taken place, while another 30 percent of the winter supply hasn't been identified.

"We're all in the same dilemma, as is the nation," he said. "Right now it's just a little bit tough to predict supply."

Atmos has more than 180,000 customers in western Kentucky, including 39,000 in the 13 westernmost counties. It is the second largest of five major firms in the state, which serve 750,000 natural gas customers.

The five companies met two weeks ago with the PSC, Kentucky Department of Energy, Attorney General's Office, and Cabinet for Families and Children, which provides home-heating help for disadvantaged people, Higdon said.

"We discussed the supply dilemma," he said. "But that was just before Hurricane Katrina."

Supply disruptions caused by the storm "simply made a bad situation even worse," Goss said, noting that most of the gas used in Kentucky comes from the Gulf Coast.

Other factors contributing to higher prices:

--The rising price of crude oil has generally helped drive up fossil fuel prices.

--A hot summer over much of the nation increased natural gas usage in some places to generate electricity for air conditioning. That higher demand drove up gas prices.

Melnykovych said sharp increases in the price of natural gas during the past two years have been eased by comparatively mild winters. A colder winter this year could cause even more price spiking, he said.

"A lot will depend on how quickly gas production and processing facilities on the Gulf Coast recover," Melnykovych said. "I don't think they've assessed the effect on undersea pipelines that move gas from wellheads to processing facilities. We're a week or two away from knowing that."

By federal law, natural gas prices are not regulated at the wholesale level, and fluctuate with supply and demand. Under Kentucky statute, gas companies are entitled to recover the wholesale cost of the gas they deliver to customers. The companies' gas-cost adjustments are reviewed by the PSC to make sure they accurately reflect the wholesale cost of gas.

In winter, 80 percent of a gas bill covers the wholesale cost of gas and the expense of moving it to suppliers like Atmos, and the rest is in distribution expenses. Atmos typically earns 2.5 to 3 cents per revenue dollar, after expenses and taxes, Higdon said.

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Copyright (c) 2005, The Paducah Sun, Ky.

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ATO,

Source: The Paducah Sun

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