Many Factors Push Natural Gas Prices

Advocate business writers

Local energy and chemical industry officials say that while a number of policy measures and new technologies can help the state with high energy prices, there is no hope of returning to the halcyon days of $2 natural gas anytime soon.

David Dismukes of the LSU Center for Energy Studies said rising natural gas costs stem from optimism in the late 1990s, when gas was selling for less than $2 per million British thermal units. Gas was cheap, appeared plentiful and both industry and environmental groups favored its use.

In the ensuing years, however, the growth in demand was much greater than expected, and natural gas proved to be a resource whose supply had little ability to expand, Dismukes said.

The gas price issue is "easily explainable by supply and demand," agreed LSU economist Loren Scott. Scott said that gas prices don't have a world market price the way oil does because of the way it's distributed.

At any given moment, there are some 3,700 tankers carrying oil to wherever happens to be the best place to sell it. And 67 percent of the oil the U.S. consumes is imported from other countries, which helps even out the price.

That contrasts with natural gas, which is primarily distributed via pipelines. Scott said there are only about 280 liquefied natural gas tankers, making prices much more regional. Excluding gas coming in from Canada, the U.S. imports less than 3 percent of its natural gas, which explains why 20-cent natural gas from Dubai and $1 natural gas from the Caribbean have little impact on the price in America.

Scott said that along the Horn of Africa and across the northern border of Russia "they've got so much natural gas they're flaring it off. Here we're dying for it."

Hurricanes Katrina and Rita have shut in about 20 percent of the Gulf of Mexico's natural gas production.

From industry's perspective, lifting drilling moratoriums that states have put into place would be the quickest and easiest way to lower prices.

"You can't drill anywhere," said Larry Wall, spokesman for Louisiana Mid-Continent Oil and Gas Association.

Wall said there are 148 trillion cubic feet of natural gas reserves off the coasts of California and Florida, in the eastern Gulf of Mexico and the Rocky Mountains, but they're off limits.

He said the natural gas-driven economic models assumed these drilling moratoriums would end, and they have not.

Industry is also betting on the construction of liquefied natural gas terminals, which take in tankers carrying a condensed, super- cooled liquid form of gas and send it through pipelines.

But LNG is no quick fix. The terminals are hugely expensive and take years to construct. And the type of LNG terminal most favored by industry has drawn concern about its possible effects on the fish populations in the Gulf of Mexico.

"The problem surrounding LNG imports is that it's going to take a while," Scott said.

Don Briggs of the Louisiana Independent Oil and Gas Association blames the threat of so-called legacy lawsuits, where a company can be sued for environmental damage caused years earlier by previous well operators.

"Right now no one wants to drill in an area where a lawsuit is possible." And that's basically everywhere in south Louisiana, because all of its fields have been drilled, redrilled and re- redrilled as wells go deeper and deeper, he said.

"The legacy lawsuits have put the screws on drilling in the southern part of the state," LSU's Scott agreed.

Natural gas is closely tied to the state's industrial sector, particularly the chemical industry, where it is used for energy and as a raw material to make products.

Dan Borne, spokesman for the Louisiana Chemical Association, said the American Chemistry Council recently found that the amount American industry spent on feedstock went from $12.8 billion in 1999 to $40.1 billion last year, much of it stemming from the rising cost of natural gas.

The chemical industry has dealt with those costs in recent years by switching to more efficient technologies, temporarily shutting down production, reducing employment through attrition and laying off workers.

Ammonia producers, whose products are used to make fertilizer, have been hit particularly hard by the natural gas run-up. Up to 80 percent of ammonia plants' production costs come from natural gas.

It hasn't been pretty.

In June 1998, the Louisiana Ammonia Producers association had nine member companies that employed more than 3,500 people. Now, the group has three companies employing 650 people.

During that time, Monsanto, Borden, Cytec, Koch Industries, Triad Nitrogen, and Farmland have all shut down their plants. CF Industries in Donaldsonville and PSC Nitrogen are among the three that remain.

"Obviously, we had a shake out in the ammonia industry," LAP spokesman Jim Harris said.

One consequence of Louisiana - and the entire U.S., for that matter - becoming less competitive economically is that multi- national companies will shift investment away to parts of the world.

A multi-national company, Scott said, "can do the exact same thing in another country using natural gas so cheap you can flare it off."

Harris said Louisiana is not seeing expansions of the size and scope that it did 10 years ago.

How well the state's industry deals with high prices is "going to depend on the individual plants and how they are integrated into the portfolios of their respective companies," Borne said.

"Within the industry, some companies are going to have to reflect on their business portfolios and make some decisions. Some are going to decide that the Gulf Coast isn't the best place to compete."

Borne said specialty chemicals producers are more insulated than bulk chemical producers, and some promising technological innovations, such as cleaner nuclear fuel, coal-fired plants and alternative feedstocks, will help take some of the edge off.

Borne said the strategic advantage of the Mississippi River is still here, and that the existing advantages enjoyed by countries in Asia, the Middle East and Africa could turn around quickly if they destabilize politically or economically.

"I'm not ready to write off our industry down here, but what I'm ready to say with some certainty is that we have some real issues to deal with because of the price of natural gas."

(c) 2006 Advocate; Baton Rouge, La.. Provided by ProQuest Information and Learning. All rights Reserved.