Some natural gas analysts are predicting major price spikes again this winter. If correct (at least one of them correctly predicted last year's $10MBtu), large users of natural gas need to be thinking now about how to protect their budgets for the coming winter.

A Bit Of Background

Most of our natural gas comes from wells in the U.S. and Canada. Demand is concentrated in the East, which is fed from pipelines starting in the Gulf of Mexico or entering from Quebec and Ontario. The situation is a bit different west of the Mississippi, but the point remains the same: nearly all the supply is local. Very little gas is imported from overseas as LNG (liquified natural gas). Gas pipeline capacity is limited in many areas, so to meet peak demands it's compressed and stored in pipelines and underground domes. The storage season starts at winter's end, and runs for several months during the summer. When storage is full, gas demand and wholesale price both drop.

But when storage is too low, competition in the following winter for the last few decatherms causes prices to spike, with one week's gas price being double that of the prior week. Only when demand drops (due to a warm snap, economic slump, or plant shutdowns) does the price come down again.

Over the last three to four years, the situation got worse as more gas-fired power plants came on-line and fewer new gas wells were drilled. Those new power plants help keep our lights on, so gas flowing to them competes with building heating and industrial loads. Environmental restrictions on burning fuel oil have also led to more gas being used to heat new homes and buildings. New wells were drilled in the '90s, but many are now played out and more are needed to match increasing demand. In the wake of the Enron bankruptcy and California debacle, credit problems arose for gas supply developers, limiting growth of new gas resources. Some see restoration of Iraqi oil supplies as helping, but it will likely be several years before that has any impact in the U.S.

Not Due To A Nasty Winter

Many in the East saw last winter's sudden jump in degree-days as the reason for the runup in gas prices. While the cold did make things worse, evidence exists to show that prices would have been high even with a normal winter. A very good analysis of the situation by Andrew Weismann, CEO of Energy Ventures Group (a wholesale dealer in natural gas), may be found at: www.energypulse.net/centers/article/article_display.cfm?a_id=324.

Weismann's thesis is simple: insufficient storage occurred last year, leading to high pricing. A deficit has developed leaving us with less gas in May 2003 than was had at the same time last year. Weismann's numbers show that getting our gas "account" to balance this winter will require filling storage at a rate never seen in U.S. history.

In a May television interview, he predicted more price spikes this winter than were seen last year and pointed out that a gas shortage could lead to insufficient gas to heat homes. Before that happens, commercial/industrial customers would be forced to switch to fuel oil or shut down their facilities. If the economy picks up by late fall, industrial demand will be greater than last year, further exacerbating the problem.

What's a Smart Plant Manager to Do?

By the time you read this, only a few months may remain to plan a response. Let your management know that it's time to contract with a gas supplier offering a fixed price contract. If your facility's boilers use only natural gas, consider changing to dual-fuel burners and installing a backup fuel source (e.g., fuel oil or propane). If a night/weekend temperature setback system is not in place or in use, make it so. Seal those drafty windows and doors, and fix those leaking steam traps. Set up a procedure for reducing interior temperatures if things get bad. Tell employees to keep a sweater at work. Watch out for electric spot heaters, however: if nearby power plants run on natural gas, you can expect winter power prices to spike, too.

Hopefully, a warm winter, a still-sluggish economy, and a recovering gas drilling industry will make all these predictions wrong. But don't bet your energy budget on it. ES