Market forces easing natural gas prices

Natural gas users were supposed to get the price shock of their lives in the new year. Nearly half the nation's gas supply is being deregulated on Jan. 1, and many had feared that lifting controls would launch gas prices into outer space.

Now, most observers don't think the theory will prove out. ''Overall, the price of gas generally should certainly not accelerate and if anything, decelerate,'' says William Higgins, a natural gas analyst at Value Line Investment Survey in New York.

Marketing is becoming pivotal in this industry, and lower gas prices for some homes and businesses may in fact be ahead.

For instance, West Coast users who face monthly Pacific Gas & Electric bills could soon get a break. The San Francisco-based distributor of ''clean fuel'' has filed for a rate reduction of $192 million with its regulatory commission. Ron Rutkowski, spokesman for PG&E, says that if the commission approves the request, it would translate to a 2 percent cut in gas bills for residential users and a 7.5 percent reduction for industrial users.

Most of the price drop is due to cheaper Canadian gas, of which PG&E happens to be the largest purchaser in the United States. The Canadian government recently slashed its regulated price of export gas to a rate fairly competitive with average prices in the US.

Mr. Rutkowski says PG&E customers may see their bills lowered again around mid-year because the company is turning to its domestic suppliers to renegotiate contracts. ''Now that all the gas is basically in the same (cost) area, we feel we're going to be able to bargain hard,'' he comments.

Bargaining is something new to this industry. Unable to sell a surplus of high-priced gas, pipeline companies have confronted gas producers to rework long-term contracts and push for discount deals. At the same time, the marketing that is bursting on to the gas scene is bringing lower prices to end-users, explains Joseph Hydok, vice-president of gas and steam operations for Consolidated Edison in New York. ''The market is working,'' he says.

This hasn't always been true. In fact, until this year gas prices were rising steeply despite the surplus (see chart). During this period the price of oil - the competing fuel to gas - fell below regulated gas prices. Gas consumption naturally dropped, but prices couldn't. Under the Natural Gas Policy Act of 1978 , prices for gas found deep in the earth were decontrolled. This is the most expensive gas to collect - but producers went for it because they could get higher prices for it. At the same time, gas distributors were locked in to ''take or pay'' contracts, long-term promises to buy gas signed for during times of tremendous gas demand back in the '70s.

Analysts don't see today's market forces turning against the consumer anytime soon. Not next year they say, and probably not even the year after that. Here is a brief outline of the various factors at work and their likely effects on deregulated gas prices in 1985:

* More Canadian gas: California, parts of the Midwest, and the Northeast should benefit the most. ''With the change in government and pricing conditions in Canada, there will be even more of a surplus. That means we won't see prices go up,'' says Daniel Yergin, president of the Cambridge Energy Research Association. ''Canada is the key to the future of the gas bubble.''

Mr. Yergin says the Canadians would like to at least double their market share in the United States, from 5 to 10 percent. Canada makes no bones about it: ''We will try and export as much as we can,'' says Anne Sicotte, at the National Energy Board in Ottawa.

* The gas surplus: This is a tough one. First, the estimates vary on how much of a surplus there is. Then, they vary on how long it will last. We've got a gas surplus, or ''bubble,'' somewhere between 1 and 2 trillion cubic feet. We'll consume 18.5 trillion cubic feet this year. The gas bubble could pop as early as the end of next year, says Edwin Rothschild, spokesman for the Citizen Energy Labor Coalition - the lone voice warning of price increases of around 10 percent beginning in the spring. Or the bubble could stay big and round until the end of the decade. Most analysts seem to be giving it another two or three years.

''In three years, the nation's going to find out it has a deliverability crisis again,'' says George Mitchell, chairman of Mitchell Energy & Development Corporation in Houston. One development backing this up is that gas exploration - responding to today's glut - has dropped off significantly.

* Falling oil prices: Spot-market oil prices dropped again last week. Because the two fuels are interchangeable in much of the industrial market, the theme has become: Where oil leads, gas will follow. ''At this point, deregulation is anticlimactic because oil prices have declined so much over the last two years, '' says Sara Johnson, senior economist at Data Resources Inc. ''We're assuming natural gas prices will fall with oil prices.''

* The gas business discovers marketing: ''The whole phenomenon of marketing natural gas is a relatively new development,'' says Brian O'Neill, president of Transcontinental Gas Pipeline, a subsidiary of Transco Energy Company, in Houston.

Transco decided it had to do something when oil prices dipped below gas prices in 1982 and '83. The pipeline company was in danger of losing major customers to oil. It hatched the ''industrial sales program,'' by which Transco would post a price keyed to oil prices. Producers could voluntarily opt to sell to Transco at that price. This helped keep industrial users on the Transco system and helped producers whittle down surpluses. This idea has since been reworked by the Federal Energy Regulatory Commission under the name ''special marketing program'' and is catching on.

But competition isn't limited to a gas and oil face-off. It's now boiling hot between the pipeline companies themselves. Industrial users and utilities weren't satisfied with gas achieving some kind of price parity with oil. If they had more than one pipeline to choose from (and some areas are so isolated that they don't), they opted for the line with the lowest prices.

Now Transco has an aggressive ''carriage contract'' plan, whereby it puts its customers directly in touch with gas producers and lets them work out a price. Then its steps back in to transport the gas.

For pipeline companies like Transco the new sales savvy has only served to keep a bad situation from getting worse. Generally, Mr. O'Neill says, Transco hasn't been picking up any new markets from this, but ''we've been able to get some of our market back and hold on to a lot of the markets we think we would have lost.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.